Qutoutiao Inc.
Q3 2020 Earnings Call Transcript

Published: 16 Dec 2020

[Operator:]

Hello, ladies and gentlemen, thank you for standing by for the Third Quarter 2020 Earnings Conference Call for the Qutoutiao, Inc. At this time, all participants will be in a listen-only mode. After management’s remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host. Please go ahead, sir.

[Sai Du:]

Thank you very much. Welcome, everyone, to the third quarter of 2020 earnings conference call of Qutoutiao, Inc. The Company's financial and operational results were released via 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 ir.qutoutiao.net. Participants on today's call will include our CEO, Mr. Eric Tan; and our CFO, Mr. Xiaolu Zhu.

[Eric Tan:]

Thank you, Sai Chi, and thanks, everyone, for joining today's conference call. We are delighted to see the resilience of our business as reflected in the results of the third quarter. Our focus for the year continues to be on the underlying profitability of the business as we go through a tough market and regulatory backdrop, partly due to the COVID pandemic. We have remained agile as a business while facing some uncertainties and changes in the operational environment this year. And we are pleased to see our efforts and perseverance bearing fruit in the form of consistently improving profitability. This has been achieved as a result of a combination of initiatives. Firstly, our marketing expenditures have followed strict ROI requirements to make sure that they are yielding factory returns. For this, we look at user acquisition and user retention separately and in combination to discern the discrepancies in constant search for room to further optimize. This perspective has been the driver behind the amount and timing of our user acquisition. As this is an important part of our daily operation, we have become structurally more efficient as a business, and this will set a solid footing for our long-term growth. Within our expenses, we have also taken a closer look at other line items, which are relatively smaller and previously had not attracted enough of our attention, such as server bandwidth costs, as well as our budgeting for headcount. These are proven to be another meaningful source of efficiency gain. Our disciplined approach towards expenses has been instrumental in protecting our shareholder value during tough times and will continue to serve us as we reemerge as the tide turns.

[Xiaolu Zhu:]

Thank you, Eric and Sai Chi, and, again, thank you, everyone, for joining today's call. Let me first review our financial results with you before providing outlook for the fourth quarter and next year. Our net revenues in the third quarter were RMB1,130 million, with an ARPU of RMB0.31. Our MAU was 121 million. As Eric mentioned, the change in our DAU and MAUs has been the result of several factors, but most notably, our active initiatives to drive more operational efficiency and a more robust user and content ecosystem. We have sharpened our focus on profitability this year on our way to achieving break-even. This has seen optimizations through our entire budgeting process. So let's take a closer look at costs and expenses. Please note I'll refer to non-GAAP measures. Cost of revenues were RMB367 million in the third quarter of 2020, a decrease of 26% from the third quarter of 2019. Part of this reduction was the direct impact of revenue adjustment on variable content costs. But another part was due to our disciplined approach towards managing the relatively fixed components, such as bandwidth server costs. As a result, our gross profit was RMB763 million in the quarter, a decrease of 16% year-on-year, while our gross margin improved year-on-year from 65% a year ago to now 67%. As Eric mentioned, we made significant savings in sales and marketing expenses, which came in at RMB679 million less than half compared to a year ago. Both user engagement and user acquisition expenses saw the same magnitude of reduction and have come down to RMB265 million and RMB386 million, respectively. Overall, our sales and marketing expenses as a percentage of revenues were 60% in the third quarter in comparison to 160% a year ago, which represents a significant improvement. Our ARPU in the third quarter was RMB0.31, largely stable throughout the year against a difficult backdrop.

[Operator:]

Thank you so much. Ladies and gentlemen, we will now begin the question-and-answer session. And our first question comes from the line of Vicky Wei from Citi. Vicky, your line is now open.

[Vicky Wei:]

Good morning, management. Thanks for taking my questions. My questions are about Midu, so what does management think of the DAU target for the 2020 and 2021? Also, what is the management view on the competition landscape for the online reading industry? Thank you.

[Xiaolu Zhu:]

Thank you, Vicky. So regarding the guidance and outlook for Midu, I think, we see a quite stable user base and improved monetization in the second-half of this year. And as we took a more balanced approach for the entire company between growth and profitability, I think, it's more or less applied to Midu as well, although we do have bigger plans for Midu for Q4 and next year. And the year-end target is to get to over 8 million to 9 million in DAUs use for Midu and a stable ARPU in line or slightly better than the rest of the company. This year, we made significant investment in content, especially proprietary content, as well as collaborations with other content providers. So as we plan to keep investing, as we believe that only a healthy content ecosystem can retain the users over the longer-term. And our proprietary platform enables us to further interact with our users and to use real-time user data for quality analysis and to give real-time feedback to the authors. So the quality of the content and the right match of authors, content and readers are the key to our long-term success for any content-based business. So, competition-wise, I think, we are seeing more players getting into the free literature market this year. But this further proves the value of the sector and we welcome players to make this a robust and healthy industry. And as we have said before, we believe the free literature market is much bigger compared to the traditional pay-to-read model. So there will always be competition from incumbent, as well as new commerce. However, our head start and experience in user acquisition, monetization and healthy content ecosystem make us uniquely positioned in this market, and we will continue to be one of the leading players in this market. Thank you.

[Vicky Wei:]

Thank you.

[Operator:]

Thank you so much. And your next question comes from the line of Thomas Chong from Jefferies. Thomas, your line is now open.

[Unidentified Analyst:]

Good morning, management. Thank you for taking my questions. I am asking on behalf of Thomas. Can management share your view on the advertising market sentiment in 2021? And maybe can you also share on the competitive landscape? Thank you.

[Xiaolu Zhu:]

Okay, thank you. I think for the second-half of 2020, we have seen the market start to pick up compared to the first-half and we expect this trend to continue. For us, we – because of the CCTV incident earlier in Q3 that caused our application to be taken off the app stores for about two weeks. So we have observed some negative impacts on our business operationally and financially due to this in Q3. But we do have seen strong demand from our advertising partners across different business sectors for Q3 and Q4.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you so much. And there are no further questions. Now, I'd like to turn the call back over to the company for the closing remarks.

[Sai Du:]

Thanks again for joining today's call. And if you have any further questions, don't hesitate to reach out to any of us. Thank you, and goodbye.

[Operator:]

This concludes today's conference call. You may now disconnect your lines and thank you.