CooTek (Cayman) Inc.
Q4 2019 Earnings Call Transcript

Published: 12 Mar 2020

[Operator:]

Good day, and welcome to the CooTek Fourth Quarter and Fiscal Year 2019 Unaudited Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.I would now like to turn the conference over to Tip Fleming at Christensen. Please go ahead.

[Tip Fleming:]

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.cootek.com and on PR Newswire.On the call today from CooTek are Mr. Karl Zhang, Chairman and Chief Architect; and Miss. Jean Liqin Zhang, Chief Financial Officer. Mr. Zhang will review business operations and company highlights, followed by Miss. 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 contains 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, expects, 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 U.S. SEC 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. Thank you everyone for joining our fourth quarter 2019 earnings call. Our performance during the fourth quarter far exceeded our expectations as our business bounced back strongly to regain its growth momentum.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.Total net revenue for the quarter was US$69 million beating our adjusted guidance of US$53 million by 30%. Our ability to derive sophisticated user insights and drive growth remains one of our key core competencies. We also made a promising progress on delivering competitive content app and building our distinctive content eco system.Our in-house ad network, CooTek ad platform grew rapidly during the quarter, which build our monetization efficiency and mitigated the risk of third-party dependency. All of this positive momentums make us optimistic on our long-term growth.Based on the current state of our business, we project our first quarter 2020 revenue to exceed US$85 million, representing above 23% growth rate sequentially despite the industry seasonality and the impact of the global coronavirus outbreak.Our focus remains on developing and growing our portfolio of content rich apps to meet the evolving needs of users. The average DAU of our content-rich portfolio apps was 24.7 million in December, up from 23.9 million in September. The MAU increased to 74.6 million in December, up from 67.5 million in December.Our content rich portfolio apps contributed approximately 95% of our total revenue during the quarter. This is a testament to our mission of empowering everyone to enjoy relevant content seamlessly.During the quarter, we were in communication with Google to clarify the potential misunderstanding behind the removal of our apps from Google Play in July. However, as of the day, those apps have not been reinstated yet. We cannot guarantee that we will prevail in our efforts or that any such removed applications will be made available again. Regardless, we have already rolled out effective operational measurements to release new content rich apps, diversifying our user growth channels such as app store and to strengthen our internal compliance efforts.With all these initiatives, our business regained strong growth momentum and we believe that the impact of Google's actions in July is behind us.We are moving on and focusing on slowing our new portfolio app. While the engagement rate of our portfolio apps was down 2% sequentially at 33.1%, we are not overly concerned. One reason for this job is that we could not use Google push notifications to reach and activate our users after our developer account was disabled.We fully expected DAU [ph] job for those apps removed by Google's actions. Thanks to the strong DAU growth of the new content-rich portfolio app, total DAU regained growth momentum.While some of our new portfolio apps have naturally lower than average engagement rates, they have much higher ARPU and overall ROI compared to the [Indiscernible] app. We are satisfied with the growth momentum of this high ARPU, but naturally with lower engagement apps. Again, we are moving on and focusing on growing our new portfolio apps.Going forward, we cannot just focus on engagement, but also on product lifetime value ROI and the value that we bring to our users. Our mission is to empower everyone to enjoy relevant content seamlessly. We believe that the global content to app market is still in its early stages, and this gives us massive opportunities in both horizontal and vertical areas.At this stage, we have focused our content app strategy on three special categories; the narrow based vertical content apps such as fitness, healthcare apps, beyond reading content apps, such as global online novels, and casual games which is typical entertainment content.We believe that these three markets are massive globally, and that we -- our sophisticated user insight driven growth platform will help us deliver a unique value proposition in this pathway.Here I want to emphasize that our first priority at this stage are to grow the user base of our content rich portfolio apps to aggressively and to cultivate our content ecosystem. We will continue to follow this strategy, and make decisions with long term growth in mind. With the current ROI level and the business opportunities, we are confident to invest aggressively to grow our user base and at the same time make great efforts to improve our app key metrics, such as user retention rate continuously.In this quarter, we released some new casual games to the global market on both Android and iPhone, such as Rancid the Raccoon [ph] [Indiscernible] and Farm Heroes. With our casual game business in its very early stage, we still have plenty of room to improve in terms of the game quality, localization and the user retention, and leveraging our user insights driven growth platform. These casual games delivered better than expected ROI, and started to contribute meaningful revenue. This gives us the confidence to invest more in this entertainment content segment.One of our strategy -- strategic goal is to strengthen our advertising business by reducing external dependencies. In the first quarter of 2019, we officially launched the CooTek advertising platform, our in-house ad network. This system allows advertisers to create and manage the ad campaigns, manage the ad budgets and replace ads in our ad portfolio directly.In the past couple of quarters, we are working hard to improve our ad network by leveraging AI technologies, optimize end-to-end ad conversions and cultivate our advertiser eco system. CooTek ad platform boosted our monetization efficiency because the average eCPM for that platform surpassed all the third party ad exchanges. And it started to contribute a significant percentage of our total advertising revenue.During March 2020, we are generating approximately 60% of our revenue from the -- from our ad networks. 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. Thank you.

[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 fourth quarter financial results and a few key results from full year 2019. All comparisons are on year-over-year basis, unless otherwise noted.Now let's start with users. Monthly active users for our portfolio products reached 74.6 million in December, up 62% from a year-ago. Average daily active users for our portfolio products in December reached about 24.7 million, up 46% compared with last year.Average daily active user on TouchPal Smart Input in December were approximately 137.6 million, down 2% from last year. MAUs were 182.8 million down 4% from last year. Total net revenue was US$69 million, up 47% from last year. Mobile advertising revenue was US$68.5 million, up about 47% from a year-agoWith total advertising revenue for the fourth quarter of 2019, portfolio products contributed about 95%, TouchPal Smart Input contributed about 1% and the TouchPal Phonebook contributed about 4%.Turning now to expenses. Debt cost and expenses were about US75.2 million an increase of 58% sequentially and up 74% from same period last year. Non-GAAP costs and expenses were US$74.8 million, an increase of 60% sequentially and an increase of 26% year-over-year.As a percentage of revenue, non-GAAP costs and expenses accounted for 108% down 150% in previous quarter. The increase in operational expenditure were mainly driven by sales and marketing expenses.Sales and marketing expenses increased by 99% from the same period last year and 90% sequentially. The largest component of these expenses is user acquisition costs, which grew in line with the overall expansion of our business. As Karl mentioned, at this stage our first priority continues to be – to be aggressively growing user base of our content rich portfolio applications and to cultivate our content eco system.With our current level of ROI and the business opportunity, we are confident that as we continue to invest aggressively to grow our user base, we should be able to maintain our fastest revenue growth in the coming periods and achieve future profitability.R&D expenses decreased by 17% sequentially and by 2% year-over-year, primarily due to the decline average compensation rates with technology R&D staff and the share based compensation expenses. We ended the quarter with 553 full time employees, up 11% from last year and up 8% from last quarter. R&D employees represent about 63% of total employees, the same as last quarter and compared with 62% last year.G&A expenses decreased by 90% sequentially and by 24% year-over-year. The sequential and year-over-year decrease were mainly due to reversal of bad debt provision of US$0.6 million during the fourth quarter of 2019.Our gross margin was 94.4% up from 92.6% during the same period last year and an increase from 87.5% last quarter. The improvement of gross margin was primarily due to our asset to optimize efficiency related to infrastructure utilization.We had a GAAP net loss of US$6.6 million, which represents a net loss margin of 9.6%. Excluding the effects of stock compensation, our adjusted net loss was approximately US$6.2 million representing a non-GAAP net loss margin of 9%.I will now quickly run through a few key four years 2019 financial results. Further details can be found in the earnings release. Net revenue was US$178 million, an increase of 33% from US$134 million in 2018.Mobile advertising revenue was US$175 million, an increase of 33% from US$131 million in 2018. Portfolio products contribute approximately 85%. TouchPal Smart Input contributed about 6% and TouchPal Phonebook contributed about 9%.Cost and operating expenses were US$215 million, an increase of 73% from US$124 million in 2018. Sales and marketing expenses were US$187 million, up 95% year-over-year. As a percentage of total revenue, sales and marketing expenses accounted for 88%, an increase from 60% in 2018, primarily due to increased investment in user acquisition.R&D expenses were US$27 million, an increase of 39% from US$19 million in 2018, mainly due to the increased cost associated with technology R&D people. As a percentage of total revenue, R&D expenses accounted for 15%, up from 14% in 2018.G&A expenses were US$16 million, an increase of 52% from US$10.7 million in 2018, primarily due to an increase of US$4.1 million in bad debt provisions. As a percentage of total revenue, G&A expenses accounted for 9%, an increase from 8% in 2018. Gross margin was 91.4% compared with 88.9% in 2018.Net loss for US$37 million compared with net income of US$10 million in 2018. Adjusted net income was US$33 million compared with adjusted net income of US$12.5 million in 2018.At the end of the year 2019, we had cash, cash equivalents and a restricted cash of about US$60 million compared with the US$85 million at the end of the year 2018. On November 26, 2018, we announced a share repurchase program. This program was terminated during the fourth quarter of 2019.We repurchased an aggregate of 1.7 million ADS for a total consideration of US$13.7 million during this time. During the process, we netted the cancellation of treasury stock with additional paid in capital.On November 20, 2019, we launched a new share repurchase program where we are authorized to repurchase up to US$6 million of our ADS during the six months period starting on November, the 20, 2019. At the end of the year 2019, we had used an aggregate of US$1.1 million to repurchase 0.2 million ADS.Turning now to the revenue outlook. We expect total revenue in the first quarter of 2020 to be above US$85 million representing an increase over 112% year-over-year. These estimates reflect our current and the preliminary view which is subject to changeOperator, we are now ready to take questions.

[Operator:]

We will now begin the question and answer session. [Operator Instructions] The first question comes from Hans Chung of KeyBanc Capital Markets. Please go ahead.

[Unidentified Analyst:]

Hi, Karl and Jean. This is Zoe [ph] on behalf of Hans. Congratulations on a strong result and thank you for taking my questions. I have two questions. The first one is, could you talk a little about the potential impact of the coronavirus outbreak, especially in the overseas market? The second why is, what do you think is the upside of the in-house ad as a percentage of the total ad revenue, and its contribution to the improvement of our ARPU? Thank you.

[Karl Zhang:]

Thank you. Let me answer these questions. So, the pandemic actually has mixed impact on our business. So travel ban kept our users at home, which resulted in higher than expected usage of our content apps. The app inventory increased accordingly with the increased time spent actually. So on the other side, coronavirus outbreak does impacts the advertising industry. So in China, we expect a strong ad budgets recovery after the spring festivals holidays. But this year, we noticed that some of the major advertisers were cutting budgets.So this caused less bidding competition on increasing ad inventory, which as a result, lower both the ad fill rates and the eCPM. So this was happening throughout all of the February and we estimate it had approximately 10% to 15% negative impact on ARPU. The market started to recover recently, but not strong enough. We anticipate the recover will happen in the second quarter actually. So as for the overseas market, especially the U.S. market, we didn't notice any significant impact yet. But we are not quite sure about the future impact as the virus continues to spread. We will see.But anyway, our guidance has already built in conservative considerations and the current ROI level of our apps is relatively safe even taking the pandemic impacts into account. So in terms of the CooTek ad platform during March 2020, we are generating approximately 60% of our revenue from our ad networks. So it boosted approximately 20% to 30% of our ARPU. So we are confident that ARPU will continue to improve ongoing. Thank you.

[Operator:]

The next question is from Nelson Cheung of Citi. Please go ahead.

[Nelson Cheung:]

Hi, management [ph], thank you for taking my question and congratulations on a solid quarter. I have two questions here. My first question is, could you elaborate more details to drivers for your strong performance in the fourth quarter 2019? And the robust sequential revenue trend as you guided. While China and global advertisers efforts have been negatively impacted by coronavirus outbreak. And these robust trends continue into the rest of 2020?And my second question is related to the marketing expense. Would you comment on the large increase of sales and marketing dollars this quarter. What types of marketing expense is that? And is that mainly for user acquisition? And what other top advertiser categories? Thank you.

[Karl Zhang:]

Thank you for your questions. So I am going to answer this questions. So let me elaborate the key drivers behind our strong performance first. So advertising business is the foundation of CooTek. The intact user insights is the plan to feel and to cultivate our sophisticated growth platform backbone. And Dimension 3 content apps categories which are long reading app, scenario-based vertical content apps, and the casual games are actually three vertical pillars on top of this foundation. So we are gaining growth momentum for all of these three categories.We are optimistic on both short-term and long-term growth despite the impact of pandemics. We noticed that some of the major advertisers were cutting budgets, which cost ARPU approximately 10% to 15% lower than our expectation in February for China market. So -- but it's now recovering. And we didn't notice any significant impact on global market yet. So we believe that the impact of the coronavirus outbreak on our business is limited, because we have big portion of advertisers coming from non-impacted industries such as the mobile gaming industry.The second question, yes, our sales marketing costs increased from US$33 million to US$63 million in the fourth quarter. So, up 91% sequentially. The sales marketing has mainly spent to acquire new users. But our total revenue was up 123% sequentially and the non-GAAP net loss decreased from US$15 million to US$6 million, down 60% sequentially. So these operating results demonstrated our strong monetization improvements, our great ROI and operational leverage. But here I want to reinforce that our first priority at this stage are to grow the user base of our content-rich portfolio apps aggressively and to cultivate our content ecosystem. But based on the current state of our business, we will continue to invest on our user acquisition without compromising our ROI level. Thank you for your question.

[Operator:]

The next question comes from Ivy Liu of Credit Suisse. Please go ahead.

[Ivy Liu:]

Hi, Jean, Karl. Thanks for taking my question. So I understand the company has started to focus on multi growth drivers since last year. So just want to have a general idea on what is the overall growth strategy or growth target for the new products including the literature app or casual games app et cetera? And second question is on the literature app, do you guys have any differentiated content strategy? That's it.

[Karl Zhang:]

Thank you. So, our mission is to empower everyone to enjoy relevant content seamlessly. So as I mentioned at this stage we have focused our content app strategy on three special categories and global online novel is actually one of them. So Crazy Reading Novel which is an app released in China is an initiative of the long reading content app market. So we do not disclose the detail number of any specific app at this moment. But yes, the growth of the Crazy Reading Novel is promising. Here I want to emphasize that our target for the long reading content app market are global.So actually we have already released online mobile apps to target oversea market as well. So we believe that we have an opportunity to disrupt the global online novel market. And we're making effort to cultivate our content ecosystem for our online novel apps. So we worked with copyrights partners to license books in China and overseas markets. At the same time we have already established in-house online literature marketplace to directly work with writers, help them submitting novels and making money. Going forward, we expect this business continue to grow and we believe that the oversea market is a great opportunity for us.In terms of the new game business category, we are focusing on casual games at this moment, because they are more suitable for our advertising business model. As of today, we have developed merged game such [Indiscernible]. Simulation games such as Farm Hero and a puzzle game such as Crazy Painting, in which we rent time. So with our casual gaming business in its very early stage, we still have plenty of room to improve in terms of game quality, localization, and the user retention rates something. By leveraging our user insights driven growth platform, this casual games delivered better than expected ROI and started to contribute meaningful revenue. So the new casual game business contributed approximately 13% of our total revenue in fourth quarter of 2019. Our game business is targeting both China and the overseas markets. Thank you.

[Operator:]

This concludes our question and answer session. I would like to turn the conference back over to Tip Fleming for closing remarks.

[Tip Fleming:]

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 us directly. Thank you for joining. Bye-bye.

[Operator:]

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