CooTek (Cayman) Inc.
Q3 2019 Earnings Call Transcript

Published: 18 Nov 2019

[Operator:]

Good day, and welcome to the CooTek to announce Third Quarter 2019 Unaudited Results on November 18, 2019. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded.I would now like to turn the conference over to Rene Vanguestaine. Please go ahead now.

[Rene Vanguestaine:]

Thank you, operator. Hello, everyone and thank you for joining us today. Our earnings release was distributed earlier today and is available on the IR website at ir.cootek.com and on PR Newswire.On the call today from CooTek are Mr. Karl Zhang, Chairman and Chief Architect; and Ms. Jean Liqin Zhang, Chief Financial Officer. Mr. Zhang will review business operations and company highlights, followed by Ms. Jean who will discuss financials and guidance. They will both be available to answer your questions during the Q&A session that follows.Before we begin, I’d like to kindly remind you that this conference contain forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intends, plans, belief, estimates, confident and similar statements.CooTek may also make return or oral forward-looking statements in its reports filed with or furnished to the US Securities and Exchange Commission and its annual report to shareholders, in press releases and other written materials and oral statements made by its officers, directors or employees to third parties.Any statements that are not historical facts, including statements about CooTek's beliefs and expectations, are forward-looking statements that involve factors, risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such factors and risks include, but are not limited to the following

[Karl Zhang:]

Thank you everyone for joining our third quarter 2019 earnings call. Our performance this quarter was better than we expected after Google disabled our access to Google Play Store and Google AdMob, negatively impacting our second and third quarters top line and bottom line.Our business started to bounce back during this quarter. We are optimistic about the coming quarter and our long-term growth. Based on the current state of our business, we have raised our revenue projections by 28% for Q4 from implied US$37 million to US$48 million as a sign of our confidence in our long-term growth and the value of our business. We also announced a new share repurchase pack.In this quarter we have been in continuous communication with Google to clarify the potential misunderstanding behind their action. However, we cannot guarantee that we will [indiscernible] on that that any such suspended or removed application will be made available again. Regardless, we are well prepared for either outcome. We have already rolled out effective operational measurements to continue to acquire new users.In the second quarter, approximately 47% of our portfolio app users were acquired through channels other than Google Pay, such as App Store, OEM preloaded store and direct download at advertising platform. This quarter we added resources to expand our acquisition -- user acquisition through those channels. Our super app TouchPal keyboard acquired users mainly through preloading, which was not impacted by Google's action. Additionally, we are also working on alternative plans to make our apps available on Google Play in case we fail to reinstate the app in the disabled account.In addition, thanks to our fast growing in-house ads network. And as a successful initiative, such as releasing more traffic to other ads exchange network, we have mitigated the impact of monetization and user growth. Our business started to bounce back during the quarter as both our daily revenue and the number of daily active users regained growth momentum. This is testament to our strong execution capability, core competency and unique value propositions build on our impact -- user impact.The average DAU of our content-rich portfolio apps was 23.9 million in September down from 27.6 million in June. But the MAU increased to 57.5 million in September as user acquisition recovered and user growth regained momentum. The engagement rate of our portfolio apps was 35.4%, down 7% sequentially. One reason is that we could not use Google push notification to which and activate user after we -- after our developer accounts were disabled. To mitigate this impact, we have already 4developed our own self-hosted push system. All of our apps will bundle our self-hosted push system in the future.Nevertheless, our engagement ratio remain very high, demonstrating the thickness our -- of our product. Based on current unit economics, key product metrics and overall ROI, we have the confidence to expand our investment on user acquisition. Our mission is to empower everyone to enjoy relevant content seamlessly. We believe that the global content app market is still in its early stages and this gives us massive opportunities in both horizontal and vertical areas.We are investing to firmly establish and continuously evolve our content ecosystem. Our sophisticated growth platform is built by leveraging our unique in-depth user insights. As we mentioned on our second quarter earnings call, late last year, we successfully expanded our product offering to China market. This quarter we released a couple of new content apps to China market such as fitness app [indiscernible] and they’re growing pretty fast. We believe our success in China market demonstrates our core competency and open up a substantial new opportunity for our long-term growth.One of our strategic goal is to strengthen our advertising business by reducing external dependency. And this first quarter of this year, we officially launched the CooTek advertising platform, our in-house ads network. This system allows advertisers create and manage ad campaign, managing at budget and put ad into our app portfolio directly. For the market, this provides [technical difficulty] interface to allow third parties to acquire mobile tracking.In this quarter, we achieved significant progress at the CooTek advertising platform starting to contribute a significant percentage of our total advertising revenue. It also boosted our monetization efficiency, because the average eCPM for the platform to pass all the third-parties ad exchanges. The daily ARPU of our content-rich portfolio app set a new record recently. We will continue to strongly invest in both advertising technologies and our ad ecosystem.With that, I will hand the call to our CFO, Jean to walk you through our financial results for the quarter.

[Jean Liqin Zhang:]

Thank you, Karl, and thanks to everyone for joining us on the call today. I’m going to walk you through our third quarter financial results.Now let's start with users. Monthly active users for our portfolio products reached 67.5 million in September, up 100% from a year-ago. Average daily active users for our portfolio products in September reached about 24 million, up 1.2x compared to last year.Average daily active user on TouchPal Smart Input in September were approximately 141 million, up 6% from last year. MAUs were 185 million compared to 180 million last year. Total net revenue was US$31.3 million, down 15% from last year. Mobile advertising revenue was US$30.5 million, down about 16% from a year-ago.With total advertising revenue for the third quarter of 2019, portfolio products contributed approximately 81%, TouchPal Smart Input contributed approximately 2% and the TouchPal Phonebook contributed approximately 17%.Turning now to expenses. Our Q3 GAAP costs and expenses were nearly US$48 million, a decrease of 80% sequentially and up 40% from the same period last year. Non-GAAP costs and expenses were US$47 million, a decrease of 8% sequentially and an increase of 40% year-over-year. As a percentage of revenue, non-GAAP costs and expenses accounted for 158%. The operating expenditure increase is mainly driven by sales and marketing expenses.Sales and marketing expenses increased by 48% from the same period last year and 2% sequentially. The largest component of these expenses is user acquisition costs and the [indiscernible] went down in late July as a result of Google's action. As we found new ways to reignite growth, we started to spend more in late August, in September with tangible results.R&D expenses decreased by 9% sequentially and increased by 34% year-over-year, primarily due to the increased costs associated with technology R&D staff. We ended the quarter with 514 full time employees, up 14% from last year and down 13% from last quarter. R&D employees represented 63% of total employees, the same as last quarter and same period last year.G&A expenses decreased by 56% sequentially and increased by 14% year-over-year. The decrease is mainly due to the accrued provision of bad debt of US$4.7 million in last quarter. The increase over last year is due to the organic growth of the company's operations.Our gross margin was 87.5%, down from 19.7% during the same period last year and slightly down from 89.4% last quarter. The lower gross margin for the third quarter is mainly due to the drop in revenue, while the cost of revenue remain stable. With revenue regaining growth momentum, we expect gross margin to recover to previous normal status.We had a GAAP net loss of about US$16 million representing a 42% of net loss margins. Excluding the effect of stock compensation, our adjusted net loss was approximately US$15.4 million, representing a 49% non-GAAP net loss margin.As of September 30, 2019, cash and cash equivalents and restricted cash was about US$56 million compared to US$63 million as of June 30, 2019. Under the share repurchase program announced on November 26, 2018, the company used an aggregate of US$12 million to purchase 1.4 million ADS as of September 30, 2019.The company will early terminate the 2018 program on November 2019 and take effect on new share repurchase program on the same day. In the new share repurchase program, the company is authorized to repurchase its Class A ordinary share in the form of ADS with an aggregate value of up to US$6 million during the six months period starting from November 20, 2019. The company expect to fund the repurchase under this program with its existing cash balance.Turning now to the revenue outlook. We expect total revenue in the fourth quarter of 2019 to be about US$48 million, representing a 2% increase year-over-year. With the fiscal year of 2019, CooTek expect total revenue to be about US$157 million, representing an 17% increase year-over-year. These estimates reflect company’s current and the preliminary view, which is subject to change.Operator, we are now ready to take questions.

[Operator:]

Thank you. [Operator Instructions] And our first question will come from Alicia Yap of Citigroup. Please go ahead.

[Alicia Yap:]

Hi. Thank you. Good evening, Karl and team. Thanks for taking my question. I have a couple of questions. It's regarding the reasons behind the fourth quarter guidance raise. So if you could elaborate a little bit would be better. So which apps that you have seen most of the apps coming from in 3Q and how should we think about the apps that contribute to the 4Q guidance raise? And also when we look at your 4Q guidance, it also suggest that there is a early sign of recovery from the negative impact that you experienced from Google last few months. So are these negative impact now largely behind us? And how should we think about the next year growth outlook? Thank you.

[Karl Zhang:]

Thank you, Alicia. So I’m going to answer this question. So, yes, our performance this quarter was better than we expected. And our business started to bounce back in this quarter based on the latest operation data. We are very optimistic about the coming quarter and our long-term growth. And that is why we have raised our revenue projections by 28% for Q4 from implied 37 million to 48 million. Actually both of our daily revenue and the number of daily active users regained the growth momentum.This is testament to our strong execution capability, core competency and unique value proposition. And the major driver behind this strong recover is the Google ad platform. Not any of individual app actually, the CooTek ad platform successfully replaced Google AdMob and raises the overall monetization for all of our portfolio ads. And I have to admit that we underestimated our potential to build up in-house ad network in Q1 and Q2. We knew that building up in-house ad network is a strategic choice for us to sustain our core business and reduce external dependency. But we underestimated our traffic value and the possibility in-house ad network could possibly boost our monetization.So we concentrate our resource to focus on developing our own ad ecosystem. We found great potential and opportunities. So as you know that most of our portfolio apps are content-rich apps, usually the transit from content apps, especially news feed [ph] ads have higher conversion for advertisers. So we scale [ph] our traffic directly to ad partners such as AdMob. They don't optimize their ad networks, specifically for our traffic. But when we build up our ad networks, we can optimize for our traffic. So we can find the specific types of advertisers based on conversion efficiency for our traffic.For example, we've found that e-commerce advertisers, especially those small and medium advertisers have higher conversion on our fitness app. Then we provide our wholesale sales network to focus on that category and introduce specific advertisers for our Fitness app. This resulted in better eCPM and even better advertiser client satisfaction. There are actually a lot of optimizations we can do to further boost our monetization. And we will continue to strongly invest in both advertising technologies and our ad ecosystem.In terms of next year, since we have regain the growth momentum and what’s more our monetization is even more stable that now, we believe, we will be on the fast lane next year not only on revenue side, but also on the product side. And we are confident to invest more on user acquisition to drive our user growth. I think I will be able to provide more color when we finish the fourth quarter. Thank you, Alicia.

[Alicia Yap:]

Okay. Thank you.

[Operator:]

Our next question will come from Tina Long of Credit Suisse. Please go ahead.

[Ivy Liu:]

Hi. Good evening, management. Thank you for taking my questions. So this is Ivy Liu on behalf of Tina. I have two questions here. First one is we understand that CooTek in-house ad system is growing really fast and mitigate some of the impact from the Google incident. So can management give some color in terms of the key metrics for ad system such as ROI and eCPM? And how the revenue growth trend will be like for next year for in-house ads? And second question is, does management have some guidance on the user growth front for 2020 in terms of MAU and DAU? Thank you

[Karl Zhang:]

Thank you. One of our strategic goal is to strength our advertising business by reducing external dependencies. In the first quarter of this year, we officially launched the CooTek ad platform and this year -- this quarter we achieved significant progress as the CooTek ad platform started to contribute a significant percent of our total advertising revenue. So, yes, it offset the impact from Google's action and boost our monetization efficiency, because the average eCPM is higher than other ad exchanges [ph]. I think, I can provide some detailed numbers here. So the average ARPU DAU of our portfolio apps in October is approximately 40% higher than Q1 average of ARPU DAU. At that time, we were not impacted by Google yet. We expect to adapt the revenue generated from our in-house ad networks will take more revenue percentage in the future. And we believe it will help to sustain our ARPU growth.And in terms of the DAU and MAU outlook, we don't provide guidance for DAU and MAU growth, but I can give you some color about it. So we -- our sophisticated growth platform is built by leveraging our unique index user impact. So we are very confident on our growth capability. So the DAU of our content rich portfolio apps started to bounce back and MAU continued its growing pace even in Q3. So we are looking forward to a strong user growth in the next year. Thank you.

[Ivy Liu:]

Thank you.

[Operator:]

And our next question will come from Hans Chung of KeyBanc Capital Markets. Please go ahead.

[Hans Chung:]

Hi. Good evening, Karl and Jean. Thank you for taking my question. So, I guess I just have one question. So in the third quarter we have the -- engagement ratio was DAU divided by MAU, came down to at 35%-ish and that's compared to the last quarter we have over 40%. And so can you expand a little bit more why we have this -- we have lower engagement ratio and also why should we think about this -- the trend going forward? Thank you.

[Karl Zhang:]

Thank you, Hans. So the engagement rate of our portfolio app was 35.4% in third quarter, down 7% sequentially. There are two major reasons. First, we could not use Google push notification service to reach and activate our users after our developer account was disabled. So push notification, e-mail push and the retargeting advertising on major channels connected to our personalized recommendation system to recall and activate our users. To mitigate this impact we have already developed our own shelf-hosted push system. All of our apps will bundle our shelf-hosted push system. And another reason for the decline is that some of our apps have higher long-term retention rates and good ROI, but have naturally lower average engagement rates.The MAU percentage of such apps are increasing. For example, Cherry, which is a female lifestyle community app, its engagement rate is around 25% to 30%, a little bit below average. But its long-term retention is very good. So it's MAU percentage is increasing. Another case is [indiscernible], which we released through China markets. Despite its engagements ratio it's a little bit lower than average, its ARPU DAU is 2x above average. So we don't think it's a problem because the overall ROI of those apps are actually above average. We cannot to just focus on engagement in the future, but products lifetime value, ROI, long-term retention rate and the value we bring to our users. Thank you Hans.

[Operator:]

[Operator Instructions] Our next question will come from Alicia Yap of Citigroup. Please go ahead.

[Alicia Yap:]

Hi. Thank you for taking my follow-up question. So Karl, I have a follow-up question on the sales and marketing spend. You mentioned since you’re increasing the budget in 3Q, which drove help to drive the DAU and MAU growth and then the sales and marketing percentage is actually higher than the revenue for the third quarter. So was these also one of the reasons that contribute to the faster fourth quarter revenue growth. So will sales and marketing need to remain high to support the stronger revenue growth into the 2020?

[Karl Zhang:]

Yes. So we are investing more to acquire users because we are pretty confident on our user growth and the [indiscernible] and unit economics is pretty good even without Google Play. So that's why we are confident to put more money to drive the user growth. And, yes, because the ROI, the total assets -- the entire ROI of our system is very good. So the budget we spend to acquire users and the part of the budget were just a change to the revenue. So part of the revenue is coming from the -- this quarter's investment to user acquisition. And we expect that the percentage of the -- of our sales and marketing costs will just decrease. But still we will continue our investments on user acquisition in the fourth quarter and next year.

[Alicia Yap:]

Okay. Thank you.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Rene Vanguestaine for any closing remarks. Please go ahead.

[Rene Vanguestaine:]

Thank you, operator. This concludes our call for today. Thank you everyone for joining the call tonight. If you have any questions or comments, please don't hesitate to reach out to any of us. Good night.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.