Qutoutiao Inc.
Q2 2019 Earnings Call Transcript

Published: 5 Sep 2019

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by, for the Second Quarter 2019 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.And I will now turn the call over to your host, Sai Chi Du [ph] Please go ahead, Sai Chi.

[Unidentified Company Representative:]

Thank you very much, and welcome everyone to the second quarter of 2019 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 Co-Founder and CEO, Mr. Eric Tan; and our Co-CFOs, Mr. Jingbo Wang and Mr. Xiaolu Zhu.Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.Please note that Qutoutiao's earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Qutoutiao's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures.Now let me start by reading out Eric's commentary on the business first.

[Eric Tan:]

I would like to review the business and our strategy with you first and then provide some outlook for the rest of the year. In the second quarter, we have focused on three things

[Jingbo Wang:]

Despite the weakness in the ad market, which directly impacts us through pricing, our unit economics remain healthy. Our average user acquisition cost was RMB6.93; our user engagement expenses for the whole group were apparently RMB0.13 per DAU per day, while our ARPU was RMB0.39.We continue to invest across the different products based on what we think makes strategic sense. We have invested heavily in Midu on the content front just before the suspension. As a result, it has a far better coverage of the high-quality books available in the market than any free-reading peer does.We have also built a very capable in-house editor team, which works with writers directly to generate original and differentiated content. We have seen pleasing performance data, which clearly shows that these original books have been well received by the readers. We have significant potential to further drive our monetization by improving the efficiency of our proprietary advertising platform, which we built last year.As the business grows, which diversifies our advertising inventories through the investment in technology and the accumulation of data, we will be able to enhance the bidding system and the targeting algorithms to close that gap between us and the established players.In the meantime, we are deepening our existing customer relationships as we build better understanding of our customers and deliver better results as well as expanding into more advertiser industries to better match the ever diversifying ad inventories that are being added onto our platform. We're also making good progress on growing revenues from casual games and live streaming.This concludes Jingbo's remarks. Now I will move on to Xiaolu's comments.

[Xiaolu Zhu:]

Our revenue has recovered from the seasonal low of Q1 to reach RMB1.4 billion in Q2, which is close to 3 times higher versus the same period last year. This rapid growth is being driven predominantly by DAU growth and has been achieved against the backdrop of a weak, overall advertising market especially from a pricing perspective. The recovery since Q2 has progressed more slowly than what one could expect under normal market conditions but we're not seeing any worsening trend.ARPU, which we define as net revenues per DAU per day, was RMB0.39 in Q2 2019 compared to RMB0.33 in Q1 2019 and RMB0.42 in Q2 2018. The year-on-year decline has been driven by the faster growth of new products such as Midu, which have lower ARPUs in comparison to Qutoutiao, and also the general weakness of the advertising market in China.Sequentially, we see meaningful ARPU growth across all products, which is a combination of favorable seasonality impact and structural improvement of monetization as products grow.Turning to costs and expenses. I will focus on non-GAAP measures, which excludes stock-based compensation. For Q2 2019, our gross margin was 74.0% which declined 1.2% quarter-on-quarter or 9.1% year-on-year, mostly due to our investment in IT infrastructure to better accommodate more bandwidth data intensive content such as videos, live streaming and games.However, sequentially, our operating margin has improved by 18.7% as we have kept our our expenses under control while monetization improved. Our user engagement expenses as a percentage of revenue have improved both sequentially and year-on-year.As we have continued to bring down the absolute amount we pay to each active user every day, which will be stable and within the range of RMB0.15 to RMB0.20 for the Qutoutiao app.Our ad load is at a healthy level, and given the potential for ad inventory increase coming from our products scaling up such as Midu and subsequently the higher efficiency of our central ad platform manifested through higher click-through rates and cost per click. We’re confident about the growth opportunities lying ahead.R&D expenses were 13.3% of revenue compared to 12.4% in Q1 2019 and 7.9% in Q2 2018 as we continued to invest in talent and our core technological capabilities, which underpin our long-term competitiveness.Other sales and marketing expenses amounted to 5.2% of revenue compared to 3.0% of revenue last quarter and 4.4% of revenue in Q2 2018. The increase was driven by our increased spending on brand advertising, which we believe would be more value creating from here onwards given that we have reached a meaningful scale. G&A expenses were stable at 3.6% of revenue, in line with history.Overall, our non-GAAP net loss was RMB496 million, representing a loss ratio of 35.8%, which has increased from a year ago, largely due to our increased investment in our IT infrastructure and the higher user acquisition costs on a per new installation basis.Looking ahead, in terms of guidance, given that Midu has been suspended for new content update and commercial activities since July 15 and will remain suspended for the rest of Q3, we will have very little revenue contribution from Midu this quarter. We do expect the business to resume regular operation by October 15, so the impact on Q4 should be small.And as discussed earlier during the call, our year-end traffic as well as revenue run rate target for Midu remains unchanged given the strong growth momentum for Midu we have witnessed in Q2 and the better than expected start of Midu Lite so far.For Q3, based on our view of the market and the operating conditions, which are subject to change, we expect net revenues to be at a similar level as we have achieved in the second quarter. This has taken into account the short-term impact of lost revenues from Midu.Finally, in terms of balance sheet, we are in a strong position with RMB2.3 billion cash. And we are confident this will support us as we take the business to the next level.That concludes all our prepared remarks today. Now we are open for questions. Operator, please proceed.

[Operator:]

Thank you. [Operator Instructions] The first question we have is from the line of Zhijing Liu from UBS. You may now ask your question.

[Zhijing Liu:]

Thank you management for taking my questions. [Foreign Language] We noticed that DAU was stagnant in 2Q. Can you elaborate more on our user acquisition strategy on both Qutoutiao and Midu and their DAU change? Due to advertising and content upgrade expansion, Midu DAU and monetization will be under pressure in 3Q. I understand that you already launched the Lite version to offset some pressures. Can you elaborate more on current progress on how you deal with the Midu app issue? I'll stop here. Thank you.

[Xiaolu Zhu:]

Thank you, Zhijing. This is Xiaolu. So regarding your first question on DAU growth trend, I think we did discuss this a little bit in our last earnings call. We have some pressure in late Q1, in early Q2 in terms of user growth due to irrational competitions in the market and also the overall weakness in ad market.But we have seen some recovery in terms of user growth starting from the second half of the second quarter, especially in June. And I would say that our user growth has since reaccelerated and that trend has been carried over to Q3.In terms of QTT and Midu on a stand-alone basis, for Qutoutiao side, I think we have seen some very healthy trends. So far this quarter, DAU on a stand-alone basis increased on average about 10% to 15% as compared to Q2 on a quarter-to-quarter basis.On the Midu side, I think as we said in our prepared remarks, we have a very strong second quarter, and the early results in the beginning of Q3 is also very good that the peak DAU for Midu has reached over 8 million at the beginning of Q3.However, we did have this suspension for Midu starting from July 15. So this will be changing for us in Q3. The suspension will last from July 15 to - until October 15. So the impact mainly felt in Q3.So to your second question regarding the Midu situation, we do have some additional efforts. First of all, that we continue to expand our content library. We continue to be the number one 1 player in the free online literature market and with a comfortable margin based on our third party data.And also, with the launch of Midu Lite, we were able to keep our combined user traffic stable for Q3 compared to Q2. Although the monetization have been stopped so the impact on revenue side will be much bigger, assuming that we have no growth for Midu in Q3, it still has at least 8 million DAU. And assuming CNY 0.30 [ph] to CNY 0.35 [ph] incomes from ARPU, that means we are losing RMB2 million in terms of revenue per day for the entirety of Q3.However, we do have better-than-expected start of the Midu Lite. So far, the traffic growth has been very strong. So we were able to keep the combined user traffic of Midu and Midu Lite at a stable level compared to Q2. And also, with the additional royalty program on Midu Lite, the new app attracts a somewhat different user base compared to the original Midu app. And with that logical one [ph] we are able to increase ARPUs as long as the early results have showed.So we are confident that both apps will do well once Midu resumes normal operation. And our year-end target of combining DAU of 10 million to 15 million for Midu has not changed.On the monetization side, I think Midu's potential has yet to be fully realized given the low ad load in the first half of this year and also the new opportunity from Midu Lite. So we believe combining the two apps will contribute potentially RMB2 million to RMB3 million per day incomes of revenue in Q4. Thank you.

[Zhijing Liu:]

Thank you.

[Operator:]

Thank you. The next question we have is from the line of Alicia Yap from Citigroup. You may now ask your question.

[Alicia Yap:]

Hi, good evening, good morning, management. Thanks for taking my questions. I have a couple of questions. Number one is just to follow up on the Midu question. I wanted to understand how sure are you regarding the regulatory headwind that we are seeing could really - got relaxed and resumed by mid-October.And then if we look forward in terms of when we can resume the monetization, how big you think the Midu app revenue grow into in terms of, let's say, percentage of total revenue contribution from Midu that you believe that could reach.And then the same question just regarding the cost expenses. So we did see some kind of like cost control or the benefit, right, user engagement coming down, but user acquisition and content procurement cost seems to be going up a little bit.So can you help us understand what will be the expense trend for the second half in terms of, let's say, the content user acquisition and user engagement? So any color on the direction, that will be helpful. Thank you.

[Xiaolu Zhu:]

Thank you, Alicia. I think regarding your first question, we are quite confident that we do will resume normal operations by October 15. We also received the Internet News License recently, so this is the first license issued since early 2017 and the first and only issued in Shanghai.So which means that - I think that our efforts from the very beginning, building our content compliance team and capabilities, has been well recognized by the regulators. And I think based on our understanding and communications with the regulators, we are quite confident that the impact of Midu in Q4 will be limited.Regarding your second question, in terms of revenue contribution, as I said previously that we do see a very healthy traffic growth of Midu in Q2 and early Q3, and also we have a very strong start of Midu Lite so far this quarter. So I think in Q4, we do have very high expectations from Midu. And with the current trends, we see that Midu can contribute up to 20% of our total revenue in Q4.In terms of your third question regarding on cost and expenses, I think that's several things. First is for content cost, I mean given the nature of our business, we believe we will be able to control the content costs at 6% to 7% level as a percentage of revenue on the QTT side, and around 20% on the Midu side, respectively.As the cash contributors command a large share of users mindshare compared to other content formats, while the tail is long and fat for both newsfeed and online literature, we are confident to keep our content costs at the level in the near future. For user acquisitions, it has been RMB6 to RMB7 per installation level for several quarters, and we don't see any big change for the rest of the year.In terms of engagement cost, I think this quarter, we were able to further reduce our average user engagement cost to RMB0.13 per DAU on a blended basis compared to CNY0.17 [ph] in Q1 and over CNY0.20 [ph] in the second half last year.The reduction is a result of our improved algorithm for which we have focused our engagement budget on users as a more susceptible to cash stimulation and also effects that we intentionally cut back some of the costs during low season and in the face of original competition in Q1 and Q2.For Q3 and Q4, we expect our average engagement cost per DAU to increase a little bit due to seasonality and better monetization on the ARPU side but still a bit low compared to the same period last year, and to be around CNY0.15 [ph] per DAU on a blended basis. Thank you.

[Alicia Yap:]

Okay. Thank you.

[Operator:]

Thank you. The next question we have is from the line of Hans Chung from KeyBanc Capital Markets. Your line is now open.

[Hans Chung:]

Thanks for taking my questions. So I have a couple of questions first. So can you give some color around your view on the 4Q revenue outlook? And then I remember last quarter, we have our annual guidance for CNY6 billion [ph] to CNY7 billion [ph], and I just wondered if that guidance is still maintained.And then secondly, things like the engagement ratio, which is DAU to MAU, and then also the conversion from installed user to MAU, if you look at the two metrics, they both came down quite a bit in the same quarter. So I just wonder what drove the trend and then how should we think about the trend to get us stabilized going forward? Thank you.

[Xiaolu Zhu:]

Thanks, Zhijing - thanks, Hans. So regarding the revenue outlook and the guidance, I think if you look at our Q3 numbers, as we explained that we have almost very little to zero revenue contribution from Midu this quarter. So our guidance for this quarter is that we believe - we are expecting Q3 revenues to be on a similar level of brackish compared to Q2 quarter-to-quarter basis.That means Qutoutiao app alone will contribute revenues on a similar level as Qutoutiao and Midu combined in Q2. So for Q4, I think once Midu resumes normal operation and also as I explained in the previous questions that we believe Midu can contribute as much as to - 20% of our total revenue. We do think that Q4 will be a strong quarter for us in terms of revenue growth.And regarding the overall annual guidance, I think, so far, average trend is growing as we expected, as we have discussed with the market before. But there is a lot of revenue in Q3 from Midu. So I think the main difference will be that part.Otherwise, we think we have strong confidence in achieving our other annual goals. Especially on the traffic side, we are still very confident that we can achieve our goal of year-end DAU of 50 million to 60 million.In terms of your third question regarding engagement ratio, I think we have touched upon that a little bit previously as well. We have some pressures in the first quarter and the first half of the second quarter due to irrational competition and the overall weakness of the market.However, we did make several efforts in terms of optimizing our user engagement costs, also increase the quality of our content. And we have seen some very promising early results starting from the second half of Q2, especially starting from June. And as I explained, we have seen a 10% to 15% user traffic growth in Q3 so far compared to Q2, and we believe the trend will continue.And also, in terms of Midu, despite the suspension, we have a very strong start of Midu Lite. So combined traffic of Midu and Midu Lite stays brackish compared to Midu in Q2. And I think we can start -- restart the growth of Midu once the normal operations resumes.So overall, I think we are still very confident in terms of achieving our year-end goal of 50 million to 60 million DAUs. And the pressure we have earlier this year, we don't think it's a long-term thing. Thank you.

[Operator:]

Thank you. We have the next question from the line of Tian Hou from T.H. Capital. Your line is open.

[Tian Hou:]

Yes. [Foreign Language] So two questions. One is regarding the retention rate. So what is the current retention rates of two apps combined? And also what is the target retention rate by the end of this year since the newer app, Midu, is going to come back live? So that - that's going to be really helpful to our retention. So that's the first question.Second question is related to advertising - advertisers. So in Q3, what are the newer or growing sector of advertisers? What are the decreasing sector of advertisers? So what trend do you see in the advertising sector front? That's two questions. Thank you.

[Xiaolu Zhu:]

Thank you, Tian. Regarding user retention, as I said earlier, we did see some pressure in the first half of this year as we continue to optimize our user engagement program while placing irrational competitions in market at the same time. And March and April are the low points for us.For Q1, we've seen a downward trend. But for Q2, we have ended the quarter on a higher mark. Quarter end DAU exceeded 40 million and the strong momentum continued in Q3. So - and also, as I said earlier, we see average DAU for the QTT app has increased over 10% so far in Q3 compared to the second quarter.Regarding the user position costs, as I explained earlier that we are trying to keep that cost down at that RMB6 to RMB7 range, and we don't have any plans to increase that budget on a large scale. So overall, I think we are planning still to continue to increase our content quality, continue to optimize our operations and to offer more social features, video games, live streaming and - et cetera, also all kinds of new content features on the QTT side to increase user engagement and activeness.And so far, we have seen some very strong early results. And as I said, that our year-end target of 50 million to 60 million DAU has not been changed so, so far, we are quite confident in terms of user traffic growth and the user retention.In terms of your second question regarding the advertisers, so far this year, e-commerce has been quite strong and continue to be the largest segment of our advertisers. Otherwise, I think most of the segments are more or less the same as previous quarter. And we think that this trend will continue for the rest of the year. Thank you.

[Tian Hou:]

Thank you.

[Operator:]

Thank you. As there are no further questions, I would now like to hand the conference back to the company for closing remarks. Again, if there are no further questions, I'd like to turn the call over to the company for closing remarks.

[Unidentified Company Representative:]

Thank you, everyone. That concludes today's conference call. Thank you.

[Xiaolu Zhu:]

Thank you.