CooTek (Cayman) Inc.
Q4 2018 Earnings Call Transcript

Published: 7 Mar 2019

[Operator:]

Good day. And welcome to the CooTek Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Christian Arnell. Please go ahead.

[Christian Arnell:]

Thank you. 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. Zhang, 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 the Section 21(e) of the Securities 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 terminology such as "will," "expect," "anticipate," "future," "intend," "plans," "believes," "estimates," "confident" and similar statements. CooTek may also make written or oral forward-looking statements in its reports filed with or furnished to the U.S. Securities and Exchange Commission and in 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 and the fiscal year 2018 earnings call. We are excited about the progress we made during the fourth quarter of last year. Q4 revenue reached US$47 million and, remarkably, the DAU of our content-rich portfolio products exceeded our expectations by reaching nearly US$17 million in December 2018, up 54% quarter-over-quarter, and contributing nearly 70% of total revenue. It only took us five quarters to grow our portfolio of products DAU from just US$1 million to nearly US$17 million while maintaining profitability. Considering the relatively short two-year history of our portfolio of products, we are very proud of these results, and are confident that we can continue to gain growth momentum. Our revenue for the full year reached US$134 million up 259% from 2017. We hit a critical milestone in 2018. We believe that the global content market is promising and we are on a fast track to take advantage of this great opportunity to become a market leader. As a market leader, we will be able to utilize greatest financial benefits in the future. That's why, as I emphasized on the last quarter earnings call, we expect growing our user base rapidly, especially the DAU of our content-rich portfolio of products as our first priority at this stage. We are very happy to see such strong DAU growth in the fourth quarter, which exceeded our expectations and will allow us to maintain our leading market position. The fast growing DAUs also demonstrates the effectiveness of our strategy to be an AI driven global content delivery platform. By leveraging our in-depth user insights and establish systematic user growth approach, we acquired new users for our content rich portfolio of products more aggressively than we did in the first quarter, and be a captive [ph] average user acquisition unique cost relatively stable. We believe that this demonstrates the sustainability of our user growth capabilities. Aside from acquiring new users, and in order to accumulate DAU even faster, we have been focusing our efforts on improving our products. We made very good progress on the product side since Q4, 2018. Our portfolios have Cherry which provides female oriented content in its new fields, including post, [Indiscernible] and shot videos was released on iPhone and that demonstrates an impressive user retention rate. It's now read as one of the most popular lifestyle apps on the App Store in the U.S. Cherry’s success iPhone demonstrates our products development capabilities and the potential our systematic user growth approach has. Three, our meditation content-app was also released on iPhone and we are also incubating a member of new content rich apps to capture mobile internet use it’s ever evolving content needs. At the same time, we have also devoted significant resources towards optimizing user experience, conference recommendation quality and app load off our existing products to continuously improve user engagement and the user retention. The user engagement which is DAU over NAU of our portfolio of products improved significantly from 33% to 37%. The second amount user retention rate improved as well. In summary, with all this efforts from user acquisition, products improvements and the optimization, DAUs of our portfolio of products grew from US$11 million to US$15.9 million up about 54% sequentially beyond our original expectation of about US$40 million with strong financial outcomes. Our super app TouchPal Keyboard continues to gain growth momentum. The average DAUs of TouchPal Keyboard were US$140.8 million in December 2018, an increase of 38% year-over-year. In the fourth quarter of last year, we signed up preload contrasts with LG, under which LG is going to preload TouchPal on some of their smartphones most devices. We consider TouchPal Keyboard as a strategic asset as it contributes very unique value to our fastest growing portfolio of products. With that, I will hand over the call to Jean Liqin to walk you through the financial results for the quarter.

[Jean Liqin Zhang:]

Thank you, Karl. And thanks everyone for joining us on the call today. I'm going to walk you through our fourth quarter financial results and a few key 2018 financial results. All comparisons are on year-on-year basis, unless otherwise noted. Now let’s start with users. We ended December with approximately 237 million people using our global products, up 50% from a year ago. Approximately 158 million people access our global products each day on average in December, up 50% from the prior year. Mostly active user on portfolio products reached 46.1 million in December, up 3.9 times from a year ago. The average daily active user on our portfolio products in December reached 16.9 million, up 4.8 times compared to the last year. Average daily users on TouchPal Smart Input in December were approximately 141 million, up 38% from last year. This number represented about 54% of 191 million monthly active users. The MAU was up 29% compared to last year. Total revenue in the fourth quarter was up 147% while advertising revenue was up about 164%. We continue to see a positive impact from our investment in user growth and advertising monetization. We estimate that of the total advertising revenue for the fourth quarter of 2018, portfolio products contributed approximately 70%, TouchPal Smart Input contributed approximately 20% and the TouchPal Phonebook contributed about 10%. With a faster growing portfolio of products user base and a sizable percentage of total revenue they contributed, we have realigned the results internally to focus more on growing our content-rich portfolio of products. So, we expect that the contribution from portfolio of products will increase in the future and with this shifting our focus, we expect the revenue from TouchPal Phonebook will decrease as a percentage of total revenue. Now turning to expenses our quarter four GAAP cost and expenses were US$43 million, an increase of 100% from last year. Cost and expenses accounted for 91% of revenue, an improvement from 113% last year and flat sequentially. We achieved the portfolio product DAU growth of 4.7 times year-on-year and 53.6 % sequentially with sales and the marketing expenses up 2.2 times year-on-year and a 40% sequentially. DAU also grew at a faster pace – faster pace than sales and marketing expenses. The sequential and year-over-year increase in sales and marketing expenses as a percentage of total revenue or primarily due to an increase investments in our user acquisitions. We ended the quarter with 498 full-time employees, up 30% from last year and 10% from last quarter. R&D employees represent 62% of total employees compared to 60% last year. During the fourth quarter, we received about US$1.5 in government subsidy a one-time reward for our successful IPO which we used these funds as a onetime bonus for our employees to [Indiscernible] for excellent achievement and the successful IPO in 2018. Our gross margin was 93%, up from 91% last quarter and 73% during the same period last year. We We had GAAP net income of US$4.1 million representing an 8.7% net profit margin. Excluding the impact of stocks compensation, adjusted net income was approximately US$4.9 million representing a 10.4% non-GAAP net profit margin. We generate the US$13.3 million from operating activities, an increase of 153% compared to US$5.3 million during the last quarter, and it compared to outflow from operations of US$1.2 million for the corresponding period in 2017. I will now quickly run through a few key Q4 year 2018 financial results. Further details can be found in the earnings release. Net revenue for the full year 2018 was US$134 million, an increase of 259% from US$37 million in 2017. Mobile advertising revenue for the full year 2018 was US$131 an increase of 275% from US$35 million in 2017. Portfolio products contributed approximately 63%. TouchPal Smart Input contributed approximately 22% and the TouchPal Phonebook contributed approximately 15% of total mobile advertising revenue. Cost and operating expenses for full year 2018 was US$124 million, an increase of US$100 million from US$61 million in 2017. Sales and marketing expenses for full year 2018 were US$80 million, up three times year-over-year. As a percentage of total revenue, sales and marketing expenses accounted for 60% an increase from 54% in 2017, primarily resulting from increased investment in user acquisitions. R&D expenses for full year 2018 were US$19 million, an increase of 50% from US$13 million in 2017, mainly due to increased cost associated with technology R&D [ph] stuff. As a percentage of the total revenue, R&D expenses accounted for 14% down from 35% in 2017. G&A expenses for the full year were US$11 million, an increase of 28% from US$8.4 million in 2017, primarily due to an increase in the management and administration staff and administrative fees. As a percentage of total revenue, G&A expenses accounted for 8%, a decrease from 22% in 2017. Gross margin for the full year 2018 was 89% compared to 46% in 2017. Net income for the full year 2018 was US$10 million compared to a net loss of US$24 million in 2017. Adjusted net income was US$12.7 million compared to an adjusted net loss of US$21.2 million in 2017. As of December 31, 2018 cash and cash equivalents were US$84.9 million compared to US$29.4 million as of September 30, 2018 and US$26.7 million as of December 31, 2017. The company used US$2.5 million to repurchase repurchase 311,010 ADSs in the fourth quarter. There are no loans outstanding as we repaid all bank borrowing in the third quarter of 2018 and our convertible redeemable preferred share were converted into ordinary share in the fourth quarter. Turning now to the revenue outlook. We expect the total revenue in the first quarter of 2019 to be between US$40 million and US$42 million representing an 82% to 92% increase year-over-year. These estimates reflect the company's current and the preliminary view, which is subject to change. Operator, we are now ready to take questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Alicia Yap of Citigroup. Please go ahead.

[Alicia Yap:]

Hi. Thank you. Good evening Carl and Jean. Thanks for taking my questions. I have two questions. Number one is related to your first quarter guidance. So I understand that could be some first quarter seasonality, but could you elaborate a little bit the reasons for these kind of lower than expected revenue guidance. And how should we be thinking about the overall revenue growth rate for the full year? The second question is, related to the sales and marketing spend. It does look like fourth quarter sales and marketing trend came in a bit higher than our estimate. Wonder it what are the reason, is that mainly because of higher channel marketing spend for the new user acquisition. And then, if you could also share with us the sales and marketing budget for 2019, that will be great. Thank you.

[Karl Zhang:]

Thank you, Alicia. I'm going to answer you the first question and I'll hand over to Jean to answer the second question. So, the first question is about the so let me just elaborate a little more on our Q1 guidance. So, our Q1 guidance reflected our strategic priority to the managing and short-term shift in focus. Substantially, all of our revenue is generated from mobile app. This industry has obvious seasonality. Our guidance is absolutely aligned with most of the mobile internet companies in the same industry. Secondly, as we mentioned before, with the fast growing portfolio product user base and the size of all percentage of total revenue be contributive. We have to realign the result internally to be more focused on growing content rich portfolio products. With this just in focus, we expect that the revenue from TouchPal Phonebook where shrinked. Our guidance reflects the decrease of the revenue from TouchPal Phonebook. And we believe this is a short-term impact as our portfolio apps are growing very fast. Certainly, as I mentioned at the beginning and in the last quarter’s earnings call, we set our first priority at this stage to grow our user base rapidly. We have been taking effort to improve the user experience including optimizing app level of our product to improve user engagement and the retention rate. Actually from late Q3, we started to patch different app load. In Q4, based on the tax results, we decided to reserve some an inventory for future use on our own initiative. Although this were impacted ARPU but we believe it is aligned with our strategy. As a result, the unit engagements rate which is the year-over-year of our portfolio products improve significantly from 33% to 37% this quarter. And the second month's retention rate improved as well. So, this helped us to reach our performing DAU growth and we are expecting stronger DAU growth this year. We are very satisfied with the balance of current ARPU and the DAU growth rate. The current ones will emphasize one point that the history of our portfolio products is relatively short. We believe that the global content at market is promising and we are on the faster track to take advantage of this great opportunity to become a market leader. As a market leader, we will be able to realize greater financial benefit in the future. As for 2019, we are confident that we can achieve high year-over-year growth rate with the strong DAU growth and ARPU increase. Thank you.

[Jean Zhang:]

Yes, this is Jean. Regarding your second question, in the fourth quarter we spend 31.6 on growth and marketing expenses representing 67% of our total revenue, slightly above our original plan. Most of the cost was spend on our prior new user. As Karl mentioned, our first priority at this stage is to grow in our user base rapidly, considering the great economics and our systematic approach demonstrated. We spent a bit more money to appoint new users, we save our unit cost to compare to last period. As a result, the DAU growth from 11 million to 16.9 million which has earned our estimation of 14 million as we noted. We are actually very happy with this result.

[Alicia Yap:]

Thank you, Jean. Any color for the spend for 2019 and then Karl to follow-up on your DAU and may you the engagement ratio. Will 2019 be similar with the fourth quarter like 36% 37%? Thank you.

[Karl Zhang:]

At this moment, we are confident that we can keep that keep relatively stable user engagement level for this year.

[Jean Zhang:]

Yes. In the fourth quarter, you can see that our engagement level improved to be around 37% and we have the confidence to remain set and stable and for the percentage of sales and marketing compared to the total revenue, we in generally we will keep the similar unit economics compared to the 2018 and of course another condition that we will grow our user base at the first priority. At the same time, we'll can show the financial result in a balanced sum.

[Alicia Yap:]

Okay, thank you.

[Operator:]

The next question comes from Gregory Gu of Credit Suisse. Please go ahead.

[Gregory Gu:]

Hi, management. Thank for taking my question. I have two questions. My first question is regarding the competition landscape of the portfolio products. So, what is the current competition landscaping overseas market when promoting our portfolio products? And who are the major competitors that we are facing. Are they are from China or are they local companies. And also, is that because of the competition, so we are changing our strategical focus for our two user growth rather than ramp-up demonetization that we have for the portfolio products. This is my first question. And my second question is about the geographic distribution for our portfolio products. Can we get some color about how much DAU or MAU are from developed areas like Europe and North America? Thank you.

[Karl Zhang:]

Thank you. So, I'm going to answer these two questions. So, the first question is about the competition. So, from my point-of-view, global content act market is promising based on our data. The months of time that global users spend on mobile devices everyday compared to Chinese mobile phone users, a radical fix up but increasing. We believe that most of the increased time was spent to consume content for different vertical. Start strategies to release multiple companies app, aps and mobile internet users every is flowing content in. so, this strategy is ensured release profit at to packet more specific need to prove and to grow at them. [Indiscernible] in this quarter. And so, the only reason that we often like [indiscernible] some type inventory of total use [indiscernible] as we improve user engagement and retention. In such optimization, the related pack actually started one to three last year. So, that [indiscernible] and engagement. So, this is for the first question. And the second question is about just -- distribution. There is no specifics in the change in terms of the MAU phase vertical distribution of our portfolio products. So, they have approximately a 32% MAU from [indiscernible] country mostly from the West. And the percentage of these major has which has relatively high monetization potential increased from 2.4% to approximately 4.3% and the percentage of southeast Asia increased from 7% to 10% and the south Asia decreased from 18% to 15% approximately. Thank you.

[Gregory Gu:]

Thank you, management.

[Operator:]

The next question comes from Emerson Chan of Bank of America Merrill Lynch. Please go ahead.

[Emerson Chan:]

Hi, management. I just have one question regarding the big jump on the other operating income in Q4. I think it is related to the go for necessity but can we elaborate more about it and how do we see the subsidiary amount in this year. Thank you.

[Jean Zhang:]

Yes, this is Jean. In the fourth quarter, we received about $1.4 million equivalent from government. At one time we worked for our successful IPO. And actually we reserve these we were into one time at one of what happened in this year and actually company use this money to found the bonus to our employee for one time reward for their achievement in last year and to discuss for our IPO. So, this is done general articulating about government subsidy.

[Emerson Chan:]

Thank you, that's helpful.

[Jean Zhang:]

Thank you.

[Operator:]

The next question comes from Hans Chung of KeyBanc Capital Markets. Please go ahead.

[Hans Chung:]

Thank you. Good evening, Karl and Jean. Thank you for taking my questions. So, I have a couple of question. First, for the fourth quarter we have a better than expected result for portfolio at DAU. And so, is that the perhaps that across the board or is on certain apps. And then, following that is for 2019, regarding the portfolio app. So, what's our I mean the going strategy, I mean how many new app are you expecting to launch for this year. And then, do you have any focus on any potential app are you seeing, it could be a big app and so you want to put more. And on that and then also any color around the geography like where you might be have more focus and then against the reorders. So, that's my question.

[Karl Zhang:]

So, thank you Hans. So, this is Karl, I'm going to answer your good question. So, I'm going to merge your questions and answer as one. So at first, I want to simplify, I want to quickly introduce the product development, the model of our company. So, based on our impact, user impact capability, we have developed a growth foundation for user prediction, unified company recommendation and monetization. So, and also we encourage product team to incubate new content rich act to catch the mobile internet users ever involving content needs. If the new app meet certain criteria and with some pretty hope products match such as the business engagements, retention and searching our eye level. So, it is graduated from incubation stage and we are going to put more results to grow it if user based in larger scale. So, that's how we work. And we're happy focusing on inputting our existing product line which covers 5000 verticals when we have deal. So, it's like healthcare, lifestyle, fitness, entertainment and the short video and make good progress. So, I have to say that the all of the five verticals are going well. And the user engagement rates of our supportive products improved significantly from 33% to 37% approximately. And here I want to highlight one app which is sharing our portfolio and sharing which propels female or rented content in as news feed including [indiscernible] was released on iPhone and demonstrated impressive user retention rate. So, it's more rent as one of the most popular apps on the app store in U.S. The shared success on iPhone demonstrate our product development capabilities and the potential of our systematic user growth approach. So, this year we're going to take more effort to grow iOS platform. And for example a three our meditation content apps were also released on iPhone. And we are hopeful incubating a number of new content rich apps and some of them are showing good momentum. So, we are expecting to release two or more new content apps in the first half of this year. Thank you.

[Operator:]

[Operator Instructions]. This concludes our question and answer session. I would like to turn the conference back over to Christian Arnell for any closing remarks.

[Christian Arnell:]

Thank you everyone, for joining the call tonight. That concludes the call. If you have any questions or comments, please don’t hesitate to reach us any time. Thank you. And good night.

[Operator:]

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