Edited Transcript of CTK.N earnings conference call or presentation 12-Mar-20 12:00pm GMT

——————————————————————————–

Kan Zhang, CooTek (Cayman) Inc. – Chairman of the Board of Directors & Chief Architect [3]

——————————————————————————–

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.

Total net revenue for the quarter was USD 69 million, beating our adjusted guidance USD 53 million by 30%. Our ability to derive sophisticated user insights and to drive growth remains one of our key core competencies. We also made a promising progress on delivering competitive content apps and building a distinctive content ecosystem.

Our in-house ad network, CooTek ad platform grew rapidly during the quarter which filled our monetization efficiency and mitigated the risk of third-party dependency. All of this positive momentum made us optimistic on our long-term growth.

Based on the current state of our business, we project our first quarter 2020 revenue will exceed USD 85 million, representing 23% growth rate sequentially despite the industry seasonality under 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 the 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 today, 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, diversify our user growth channels such as App Store and strengthen our internal compliance efforts. With all these initiatives, our business regained strong growth momentum, and we believe that the impact of Google’s action in July is behind us.

We are moving on and focusing on slowing our new portfolio apps. While the engagement rate of our portfolio apps was down 2% sequentially at 33.1%, we are not overly concerned. One reason for this drop is that we cannot use Google push notification to reach and activate our users after our developer account was disabled. We fully expected DAU to drop for those apps removed by Google’s action. Thanks to the strong DAU growth of the new content-rich portfolio apps, total DAU regained growth momentum.

While some of our new portfolio apps have naturally lower than average engagement rate, they have much higher ARPU and overall ROI compared to the removed apps. 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 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 3 special categories: scenario-based vertical content apps, such as fitness, health care apps; long reading content apps, such as global online novels; and casual games, which is typical entertainment content.

We believe that these 3 markets are matched globally and that we — our sophisticated user insight-driven growth platform will help us deliver a unique value proposition in these categories.

Here, I want to emphasize that our first priorities at this stage are to grow the user base of our content-rich portfolio apps 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 rates continuously.

In this quarter, we released some new casual games to the global market on both Android and iPhone, such as Idle Land King Tycoon, Crazy Painting and Farm Hero. 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 by 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 ’19, we officially launched the CooTek advertising platform, our in-house ad network. This system allows advertisers to create and manage ad campaigns, manage ad budgets and place ads in our app portfolio directly.

In the past couple of quarters, we have worked hard to improve our ad network by leveraging AI technologies, optimized end-to-end ad conversions and cultivated our advertiser ecosystem. CooTek ad platform boosted our monetization efficiency because the average eCPM for the 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 network. 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.

——————————————————————————–

Liqin Zhang, CooTek (Cayman) Inc. – CFO [4]

——————————————————————————–

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 our Q-o-Q results from full year 2019. All comparisons are on a year-over-year basis, unless otherwise noted.

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 user 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 about 137.6 million, down 2% from last year. MAUs were 182.8 million, down 4% from last year. Total net revenue was $69 million, up 47% from last year. Mobile advertising revenue was $68.5 million, up about 47% from a year ago. With total advertising revenue for the fourth quarter of 2019, portfolio products contributed about 95%, TouchPal Smart input contributed about 1% and TouchPal Phonebook contributed about 4%.

Turning now to expenses. GAAP costs and expenses were about $75.2 million, an increase of 58% sequentially and up 74% from same period last year. Non-GAAP costs and expenses was 74% — $74.8 million, an increase of 60% sequentially and an increase of 76% year-over-year. As a percentage of revenue, non-GAAP costs and expenses account for 108%, down from 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’s mentioned, at this stage, our first priority continues to be aggressively growing user base of our content-rich portfolio applications and to cultivate our content ecosystem. With our current level of ROI and the business opportunities, we are confident that as we continue to invest aggressively to grow our user base, we should be able to maintain our faster 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 a decline in 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 19% sequentially and by 24% year-over-year. The sequential and year-over-year decrease were mainly due to reversal of bad debt provision of $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 efforts to optimize efficiency related to infrastructure utilization. We had a GAAP net loss of $6.6 million, which represents a net loss margin of 9.6%. Excluding the effects of stock compensation, our adjusted net loss was approximately $6.2 million, representing a non-GAAP net loss margin of 9%.

I will now quickly run through a few key full year 2019 financial results. Further details can be found in the earnings release. Net revenue was $178 million, an increase of 33% from $134 million in 2018. Mobile advertising revenue was $175 million, an increase of 33% from $131 million in 2018. Portfolio products contributed approximately 85%, TouchPal Smart input contributed about 6% and TouchPal Phonebook contributed about 9%.

Costs and operating expenses were $215 million, an increase of 73% from $124 million in 2018. Sales and marketing expenses were $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 investments in user acquisition.

R&D expenses were $27 million, an increase of 39% from $19 million in 2018, mainly due to the increased costs 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 $16 million, an increase of 52% from $10.7 million in 2018, primarily due to an increase of $4.1 million in bad debt provision. 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 was $37 million compared with net income of $10 million in 2018. Adjusted net income was USD 33 million compared with adjusted net income of $12.5 million in 2018. At the end of the year 2019, we had cash, cash equivalents and restricted cash of about USD 60 million compared with USD 85 million at the end of 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 USD 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 repurchase up to USD 6 million of our ADS during the 6-month period starting on November 20, 2019.

As of the end of the year 2019, we have used an aggregate of USD 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 USD 85 million, representing an increase over 112% year-over-year. These estimates reflect our current and the preliminary view, which is subject to change.

Operator, we are now ready to take questions.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) The first question comes from Hans Chung of KeyBanc Capital Markets.

——————————————————————————–

Zheqian Deng, KeyBanc Capital Markets Inc., Research Division – Associate [2]

——————————————————————————–

This is Zoe on behalf of Hans. Congratulations on the strong result. I have 2 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 one 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?

——————————————————————————–

Kan Zhang, CooTek (Cayman) Inc. – Chairman of the Board of Directors & Chief Architect [3]

——————————————————————————–

Thank you. Let me answer this question. So the pandemic actually has mixed the impact on our business. The travel ban increased our users at home, which resulted in higher-than-expected usage of our content apps. The app inventory increased accordingly with the increased time spend, actually. So on the other side, coronavirus outbreak does impact the advertisement industry. So in China, yearly, we expect a strong ad budget recovery after the Spring Festival 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, lowered both the ad fill rates and the eCPM. So this was happening throughout all of the category, and we estimate it had approximately 10% to 15% negative impact on our ARPU.

The market started to recover recently, but not strong enough. We anticipate that the recovery 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 that the current ROI level of our apps is relatively safe, even taking the pandemic impact into account.

So in terms of the CooTek ad platform, during March 2020, we are generating approximately 60% of our revenue from our ad network. So it boosted approximately 20% to 30% of our ARPU. So we are confident that the ARPU will continue to improve ongoing.

——————————————————————————–

Operator [4]

——————————————————————————–

The next question is from Nelson Cheung of Citi.

——————————————————————————–

Fuk Lung Cheung, Citigroup Inc, Research Division – Associate [5]

——————————————————————————–

Congratulations on the solid quarter. I have 2 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 will this — will the trend continue into the rest of 2020? And my second question is related to the marketing expense. Could 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 are the top advertiser categories?

——————————————————————————–

Kan Zhang, CooTek (Cayman) Inc. – Chairman of the Board of Directors & Chief Architect [6]

——————————————————————————–

Thank you for your question. So I’m going to answer this question. So let me elaborate the key drivers behind our strong performance first. So advertising business is the foundation of CooTek. The intact user insight is the plan to field and to cultivate our sophisticated growth platform backbone. And the mentioned 3 content apps categories, which are long reading apps, scenario-based vertical content apps and the casual games, are actually 3 vertical pillars on top of this foundation. So we are gaining growth momentum for all of these 3 categories. We are optimistic on both short-term and long-term growth despite the impact of pandemic. We noticed that some of the major advertisers were cutting budgets, which caused the 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 nonimpacted industries, such as the mobile gaming industry.

The second question, yes, our sales and marketing costs increased from $33 million to $63 million in the fourth quarter, so up 91% sequentially. The sales and marketing is mainly spent to acquire new users, but the total revenue was up 123% sequentially and that non-GAAP net loss decreased from $15 million to $6 million, down 60% sequentially. So this operating result demonstrated our strong monetization improvements, our great ROI and operational leverage.

So here, I want to reinforce that our first priorities at this stage are to grow the user base of our content-rich portfolio apps aggressively and to cultivate our content ecosystem. So based on the current state of our business, we will continue to invest on our user acquisitions without compromising our ROI level.

——————————————————————————–

Operator [7]

——————————————————————————–

The next question comes from Ivy Liu of Crédit Suisse.

——————————————————————————–

Ivy Liu, Crédit Suisse AG, Research Division – Analyst [8]

——————————————————————————–

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.

——————————————————————————–

Kan Zhang, CooTek (Cayman) Inc. – Chairman of the Board of Directors & Chief Architect [9]

——————————————————————————–

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 3 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 for the long reading content app market. So we do not disclose detailed number of any specific apps 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 overseas market as well. So we believe that we have an opportunity to disrupt the global online novel market. And we are making effort to cultivate our content ecosystem for our online mobile apps. So we worked with copyright 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. So going forward, we expect this business continue to grow, and we believe that the overseas 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 merge games, such as Idle Land King Tycoon, simulation games such as Farm Hero and the puzzle game such as Crazy Painting, in which we run ads. So with our casual game business in its very early stage, we still have plenty of room to improve in terms of game quality, localization, user retention rates. By leveraging our user insights-driven growth platform, these casual games delivered better-than-expected ROI and have started to contribute meaningful revenue. So the new casual game business contributed approximately 13% of our total revenue in fourth quarter of 2019. So our game business is targeting both China and the overseas market.

——————————————————————————–

Operator [10]

——————————————————————————–

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

——————————————————————————–

Tip Fleming, Christensen & Associates – MD [11]

——————————————————————————–

Thank you, operator. This concludes our call for today, and 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 [12]

——————————————————————————–

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