Qutoutiao Inc.
Q3 2018 Earnings Call Transcript

Published: 12 Nov 2018

[Operator:]

Hello, ladies and gentlemen, thank you for standing by for the Third Quarter, 2018 Earnings Conference Call for Qutoutiao Inc. At this time, all participants are 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, Oliver Chen, Chief Strategy Officer of the company. Please go ahead, Oliver.

[Oliver Chen:]

Hello everyone and welcome to the third quarter 2018 earnings conference call of Qutoutiao Inc. The company's financial and operational results were issued via Newswire Services earlier today and are 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 Mr. Eric Tan, Co-founder and Executive Chairman; Mr. Jingbo Wang, Chief Financial Officer

[Eric Tan:]

Thanks Oliver. Hello everyone. Thank you for joining Qutoutiao's first earnings conference since our IPO in September. In the third quarter of 2018 our growth momentum remained strong with average DAUs growing nearly 70% and our revenues growing more than 100% from the previous quarter. These numbers demonstrate how products per directly among users as well as our ability to compete effectively. We continue to see strong growth in mobile users from lower-tier cities in China with our innovative business model and extensive experience in this market segment. At year end [ph] we are well positioned to capitalize on such growth. Our goal is to become a major gateway to the mobile internet for users from lower-tier cities and the key access point for businesses that want to tap into these users. In the fourth quarter of 2018 we will continue to focus on improving the quality and breadth of our content, refine our content recommendation technology and selectively expanding into new content categories to further enhance the user experience. With that, I will now turn the call over to our CFO Jingbo to discuss our financial performance in the third quarter.

[Jingbo Wang:]

Thank you, Eric. Hello everyone. Our topline has been growing very rapidly in this year. Our net revenue has grown more than 100% from Q1 to Q2 and grew more than 100% gain from Q2 to Q3 reaching RMB977 million. This was driven by both DAU growth and improved monetization efficiency. Our net revenues for DAU per day or ARPU grew from RMB0.23 in Q1 to RMB0.43 in Q2 and further to RMB0.50 in Q3. Thanks to our high quality traffic and increasing sophistication of our proprietary advertising platform. In terms of margins, our gross margin remained healthy at 84%. Sales and marketing expenses were 107% of net revenues. As we have continued to focus on acquiring users and such expenses were an important driver of our rapid growth in user base and net revenues in this quarter. We also invested heavily in R&D to enhance our technology capabilities. Expenses accounted for 8% of our net revenues. Our G&A expenses in this quarter included RMB650 million well of share based compensation expenses in relation to the share restructuring deed entered into by certain of our co-founders. To put it simply, these co-founders voluntarily restricted part of their shares back in January 2018 and these shares became unrestricted fully and immediately upon our IPO in September resulting in this one off charge. But then to reiterate, this is not a grant of shares from the company to the co-founders but really just the co-founders' own shares becoming unrestricted. If we exclude share-based compensation expenses our non-GAAP net loss for this quarter was RMB298 million. During the same period our net cash used in operating activities was RMB75 million, significantly smaller than the net loss. With that, I will now turn the call over our Investor Relations Officer, Carter [ph] to share more financial details from Qutoutiao.

[Unidentified Company Representative:]

Thank you, Jingbo. Hello everyone. This Carter from Qutoutiao. Now I'd like to walk you through our detailed financial results in the third quarter of 2018. Net revenues for the third quarter of 2018 were RMB977.3 million, an increase of 520.3% from RMB157.6 million in the same period of 2017. Of the net revenues our Advertising revenues were RMB896.5 million an increase of 472.3% from RMB156.7 million in the same period of 2017 primarily due to the increases in our average DAUs, average daily time spent per DAU and our ability to monetize our traffic. Other revenues were RMB80.9 million in the third quarter of 2018, a significant increase from RMB0.9 million in the same period of 2017. Other revenues primarily represent revenues from online marketing platform services, and growth was driven by the expanding scale and the increasing sophistication of our advertising platform. Cost of revenues were RMB153.8 million in the third quarter of 2018, an increase of 638.4% from RMB20.8 million in the same period in 2017, primarily attributable to increases in content procurement costs and in salaries and benefits associated with an increase in headcount in the content management team. Gross profit was RMB823.5 million in the third quarter of 2018, an increase of 502.3% from RMB136.7 million in the same period of 2017 and our gross margin was 84.3%, compared with 86.8% in the same period in 2017. In our operating expenses, research and development expenses were RMB80.2 million for the third quarter of 2018, a significant increase from RMB3.9 million for the third quarter of 2017, primarily due to our efforts to enhance technology capabilities, especially our content recommendation technology. Sales and marketing expenses were RMB1,045.0 million and increase of 659.8% from RMB137.5 million for the third quarter of 2017, primarily attributable to our continued efforts in acquiring call users and the increased loyalty program cost due to our engaged and growing user base. General and administrative expenses were RMB741.6 million, a significant increase from RMB6.8 million for the third quarter of 2017, mainly due to the share-based compensation expenses of RMB717.7 million. Upon the completion of the Company’s initial public offering we immediately recorded a one-off share based compensation expense of RMB649.7 million. Net loss was RMB1,033.4 million compared with a net loss of RMB11.5 million in the same period of 2017. Non-GAAP net loss was RMB298.4 million, compared with Non-GAAP net loss of RMB10.7 million in the third quarter of 2017. Net loss attributable to ordinary shareholders were RMB1055.1 million compared with RMB 11.5 million in the second quarter of 2017. Non-GAAP net loss attributable to ordinary shareholders was RMB320.1 million compared with RMB10.7 million in the same period of 2017. As of September 30, 2018 the company had cash, cash equivalents and short term investments of RMB2476.7 million compared with RMB1776.6 million as of June 30, 2018. Now for guidance for the fourth quarter of 2018 we currently expect net revenues to be in the range of RMB1.2 billion to RMB1.25 billion. This forecast reflects the company's current and preliminary views on the market and operational conditions which are subject to change. This concludes our prepared remarks. We’ll now open the call to questions. Operator, please go ahead.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Alicia Yap from Citi. Please ask the question.

[Alicia Yap:]

Hi. Good evening. Thanks Oliver, Eric, and Jingbo, congratulations on your first public results. Thanks for taking my questions. I have a couple of questions. Number one is that given a lot of the companies have been commenting about these latest macro environment and also the current sentiment in terms of the advertising customer budget. So could you share us what are some of the current sentiments currently from your top advertising customer? And also if you could share with us maybe your top three to five industry vertical in terms of the ad revenue contribution? And then second I have a question regarding the sales and marketing spend in the fourth quarter, could you give us some breakdown in terms of the retention cost versus the new user acquisition? And is there any change for your future new user acquisition strategy in light of this current macro environment as we head into next year? Thank you.

[Eric Tan:]

Thank you, Alicia. Give us one second. So we do see a slowdown of the macroeconomics in China as indicated by many of our peers as well. However, we are less impacted by that while we are less impacted than many of our peers because our traffic focus on lower tier city audiences which is in high demand as many of our peers are trying to penetrate this specific segment. We also do see more and more advertisers, spending their marketing and advertising dollar in this segment. So we are somewhat impacted, but less impacted than many of our peers.

[Jingbo Wang:]

In terms of our verticals e-commerce remains to be one of the top vertical in our advertising mix followed by the apps download, games download and also the finance. Is that okay Alicia? Did answer your question?

[Eric Tan:]

Is that okay, Alicia? Did it answer your question?

[Alicia Yap:]

Yes, so maybe before you go onto the sales and marketing answer, can I follow up on that regarding these games downloads? I understand you mentioned previously you guys will be less impacted compared to some of the tiers their focus on the first tier city. But given this game regulation showed up has been a while and we've also seen some company that has the games exposure also quoted more cautious guidance, so any impact for us on the games download revenue? Thanks.

[Jingbo Wang:]

Alicia, the games industry’s recent regulation has limited exposure for us, game downloads is above high single digits to low double-digits in terms of advertising revenue stream wise for us. And most of our games are casual games, so that’s also impacted by the recent regulation as well. Does that answer your question, Alicia?

[Alicia Yap:]

Yes, that’s very helpful and also if you can elaborate on the sales and marketing spend and also the use the acquisition strategy?

[Eric Tan:]

Sure. You can see already from the Q3 results, we have been still growing very rapidly in terms of the user base and we think at this stage, we still see a lot of potential in this lower Tier 2 cities markets and we want to become major source of traffic in this market and that’s why we plan to continue our strategy of acquiring users here and also the user acquisition cost has gone up a little bit. We still think the ROI, the return on investment from user acquired is pretty flat. So we from our management perspective, we think we will continue the relatively fast pace of growth. And on the other hand, we understand that this has lot of pressure on the P&L. So our plan is really to further improve the manipulation that we can really solve the problem from the revenue side and not just from the cost side.

[Alicia Yap:]

I see. Just can I quickly followup, any change is let's say the macro gets worse and we also get impacted, we achieved will change our or scale back the user acquisitions sent next year?

[Eric Tan:]

Give us one second. I think the key is really the ROI. We evaluate this quite internally whether to call more users or less, it’s real question of ROI as long as the ROI is still satisfactory we can make money back in several months, we feel it’s worth it. So unless the macro environment changes significantly next year, we don’t think at this point we are ready to [indiscernible].

[Alicia Yap:]

Okay, great. Thank you, very helpful. I will try to get back on the queue. Thanks.

[Operator:]

Thank you. Our next question comes from the line of [indiscernible] from UBS. Please ask the question.

[Unidentified Analyst:]

Yes hello, management thank you and this is [indiscernible] from UBS and I have two questions. First is literally we see more advertisements from big dance to promote its inventory is first question, how many apps like TikTok and with few competitions you acquire our similar users become more intensified, so do you have any comments on the competition side? And for the round user growth is the new version of May, how long we feel can it be extended? And second question is what is your DAU and ARPU assumptions behind this 4Q revenue guidance, any comments on this? Thank you.

[Eric Tan:]

Please give us one second. Good morning Liu, I think it is pretty common that a company cross promotes their own product within their different product offerings. So I think what [indiscernible] is doing is not something unusual. But we do understand that the competition has been tough and more fierce since last, since the second half of 2017 and really just not on [indiscernible] even though it is the largest, one of the largest companies out there. There are also smaller competitors coming to this space and also other people are doing content feed as well. But we do believe that as long as we continue to innovate our product that we will – we are confident about sustainable growth in the near future still and I will leave the numbers, the other questions to Jingbo.

[Jingbo Wang:]

Yes, so regarding the ARPU and DAU assumption, I think we are being prudent here that we use flat ARPU assumption, so we assume, we expect Q4 ARPU will be generally in line with Q3 ARPU. So you can do the math yourself on the DAU side.

[Unidentified Analyst:]

Okay, thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Hans Chung from KeyBanc Capital. Please ask the question.

[Unidentified Analyst:]

Hi management team, this is Yan Jing [ph] speak for Hans. Thanks for taking my question. So I just have one followup question regarding the user acquisition cost and engagement cost for 3Q, so could you please talk about what are those costs in 3Q and how about the trend in 4Q? Thanks.

[Jingbo Wang:]

Sure. So in 3Q the user engagement cost was close to 50%, below 50% of our revenue, that is in line with our expectations and it’s on a slight downward trend right now in terms of the percentage. That is the user engagement part. On the user acquisition part, about half of our sales and marketing expenses in Q3 was spent on user acquisition and a per user basis it’s slightly more expensive than before, but still well within control and ROI is still pretty good. So going into Q4, as I said, engagement cost side is on a slight downward trend and the user acquisition cost so far has been stable.

[Unidentified Analyst:]

That’s helpful, thank you.

[Operator:]

Thank you. Our next question comes from the line of Xueru Zhang from 86Research. Please ask the question.

[Xueru Zhang:]

Hi management, thank you for taking my questions. My first question is followup of the last question on the user acquisition spend, I’m wondering what are the major channels of Qutoutiao to acquire users besides user logic program and can you compare the ROI of each channels versus the user logic program? And my second question is related to the business outlook, can management share with us the strategy for the next year, specifically your plan for user acquisition and the sales and marketing expenses and what is your DAU target at the end of next year? Thank you.

[Jingbo Wang:]

Sure. So in addition to the referral programs, where our users refer other users, we also use external marketing channels such as the appstores, the stores run by the, operated by the phone manufacturers, and also other online marketing channels including the reading apps and all these we evaluated these only factor the user acquisition costs and of course among all these channels, the referral is to the best channel, it’s not just as the cost is low, it’s really because of better targeting because these users are target users, retention rate in the long-term is significantly higher. But on the other hand we still do these external channels because this will expand our user base and plan new seed for us to grow to refer other users as well. So that’s your first question. Are there other questions?

[Xueru Zhang:]

Yes. And my second question is related to the business outlook, the strategy for the next year for the user acquisition and the sales and marketing expenses and the DAU target by the end of next year? Thanks.

[Jingbo Wang:]

Give us one second. So next year I think we're continuing with a referral program and also or the external online channels, but we're also starting to move our brand promotion and also acquire users from offline channels. In terms of the target, we plan to reach DAU between 50 million to 60 million end of next year.

[Xueru Zhang:]

That's very helpful. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Tian Hou from TH Capital. Please ask the question.

[Tian Hou:]

Yes, management, so the question is really related to the sectors you are focusing on. So I wonder what are the main sectors in your advertising platform. So one person asked the question related to the slowdown of the economy; however actually, that is in general, overall there is a slowdown, but to some other part of the business are actually not necessary slowdown. And so the questions is really related to which part of the economy are you providing advertising [indiscernible] to, is that the growing one or is that the declining one, so that’s a number one question? Number two, I saw the market expect hike, so I wonder what can happen going forward to this line of the income statement? That's the two questions. Thank you.

[Eric Tan:]

Just give us one second. Thank you for your question. I think I want you know is that our advertisers are performance advertisers who are looking to reach the lower tier city users. Right? So even though the macro economy doesn't seem to be very positive, currently these performance advertisers are still looking to spend advertising budget if they can obtain the ROI that they are seeking. And also know that, this group of people, tier 3 and below city users continue to be very strong. The recent largest ecommerce event in China has proven that ecommerce sector is continuing to grow even though the game sector might be slowing down quite a bit. So overall given that ecommerce sector is one of our largest advertiser spend category this is also helping us in terms of achieving our growth as well, and I'll give the second question to our CFO.

[Jingbo Wang:]

On the sales and marketing side also we see one line on the income statement which is a very large number. It actually consists of two components, user engagement part and also the acquisition part. For the first part we are actively controlling that expense, so we think going forward as a percentage of revenue those engagement costs will gradually decline. On the second part, the user acquisition part, we are actually saying this is really investing for the future, also we book all the expenses in the current period, these expenses bring in the users and the users stay with us for a very long time. So we’re really saying why don’t you look at this as an investment for the future and in the coming one or two quarters we do expect to continue to be focused on acquiring new users.

[Tian Hou:]

I still got a followup question, so regarding what you said Jingbo, you want users to stay with you by spending money and so I do want to know, so in the last several quarters and do you see the churn rate to decline?

[Jingbo Wang:]

The churn rate actually has been, okay there was a big chuck, big improvement in April/May this year and after that the churn rate had been quite stable.

[Tian Hou:]

Okay, thank you. That’s all my questions. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Hanjoon Kim of Deutsche Bank. Please ask your question.

[Hanjoon Kim:]

Great, thanks. Thanks for the chance to ask a question. I apologize I dialed in late, so I wasn't sure if this was answered, but in terms of your ability to monetize your users can you just give us an updated walk on how you see, kind of your revenue per DAU and the growth for your ARPU curve? And I am cognizant of the macro issues and whatnot that was discussed slightly earlier, but in terms of, how you think about your ability to increase advertising revenues on video or some other initiatives, if you just kind of give us little bit update? I feel like third quarter we had maybe a bit of a better DAU, but maybe not as much growth on the ARPU side, so maybe just contextualizing 3Q and how you want to grow it over time that will be a great update? Thank you.

[Jingbo Wang:]

Actually, I think 3Q the ARPU was already up quite a bit from Q2 of 0.43, Q3 was 0.50 and we do expect Q4 to be generally in line with Q3 in terms of ARPU and I think given the macro backdrop as many of you already mentioned this is in my view pretty positive result and this was achieved through, number one more advertisers bidding here and number two the addition of newer advertisement format as you’ve mentioned, we do apps and also interactive apps. And lastly also because more and more businesses are realizing the value of lower tier city population and they are trying to tap into this group of users, and that’s why we feel that we are less impacted by this general macro slowdown than many of our peers, so we still feel pretty comfortable of our guidance for Q4.

[Hanjoon Kim:]

Great, thank you.

[Operator:]

Thank you. [Operator Instructions] As there are no further questions now, I will turn the call back to the company for closing remarks.

[Oliver Chen:]

Well, thank you once again for joining us today. If you have further questions, please feel free to contact Qutoutiao’s Investor Relations through the contact information provided on our website or The Piacente Group Investor Relations. Have a great day.