Qutoutiao Inc. (QTT) on Q2 2021 Results - Earnings Call Transcript
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Operator: 00:02 Hello ladies gentlemen, thank you for standing by for the second quarter twenty twenty one Earnings conference call for Qutoutiao Inc. At this time, all participants are in a listen-only mode. 00:18 Today's conference call is being recorded. I will now turn the call over to your host, Sai Chi Du. Please go ahead, Sai Chi.
Sai Chi Du: 00:26 Thank you very much. Welcome everyone to the second quarter of twenty twenty one 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. 00:48 Participants on today's call will include our CEO, Mr. Eric Tan; and our CFO, Mr. Xiaolu Zhu. 00:55 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 nineteen ninety five. Forward looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. 01:14 Further information regarding these and other risks and uncertainties is included in the company's perspectives 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. 01:32 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. 01:51 I will start by reading out Eric commentary on the business first.
Eric Tan: 01:57 Than you Sai Chi and thanks everyone for joining today's conference call. As our recent focus has been on repositioning the business and improving underlying financial health, we have had a relatively quiet and a stable second quarter, during which both our revenue and the size of our user base have maintained stability. Therefore, our monetization efficiency in terms of ARPU was also on a stable trajectory despite us facing some headwind in the overall advertising its market. 02:28 Post COVID-nineteen in China, the market backdrop has not been on a whole favorable for digital advertising, although we did observe some recovery from the negative effect on advertiser spending. It is the uncertainty or the lack of visibility going forward that has dictated much of advertising customers budgeting decisions. 02:48 We expect the second half of the year to continue to be under pressure as there has not yet been sign of a straight upward momentum. For our business, while we cannot control the wider industry variables, we focus on putting effort into improving operating efficiency and growing Midu Novel, which forms the key part of our growth strategy forward. 03:12 Midu has seen a very positive growth trend with DAU average in the second quarter of this year. So, we are well on track to achieve our full year target. What is driving Midu is our consistent investment into building a rich content offering and an innovative format of interaction to reach users. Most notably through our proprietary content creation platform and the mini drama series, which we believe has more potential to create value currently obvious. 03:43 It is a naturally more engaging format and will play an important role in the exploration and the development of Value of the books we own copyright too. Recently, there has been concern among investors and observers regarding the regulatory actions on the Internet industry. We see them as a positive on the long term health, growth, and stability of the Chinese tech industry, as well as the country's economy as a whole. 04:12 As always, we will stick to the highest standard of conduct and compliance with rules and regulations of the land. Thank you very much.
Sai Chi Du: 04:21 This concludes Eric's remarks, and I will now turn the call over to our CFO, Xiaolu.
Xiaolu Zhu: 04:30 Thank you, Eric and Sai Chi. And again, thank you everyone for joining today's call. Let me first go through financial highlights with you before providing outlook for the third quarter and the rest of the year. Our net revenues for the second quarter were RMB 1.202 million with ARPU up RMB forty six cents and quarterly average DAU of twenty nine million dollars and MAU of one hundred and thirty two million, flattish sequentially as we focus on underlying financial health, while pursuing growth very selectively. 05:01 Let's look at costs and expenses in a bit more detail. Please note, I will be referring to non-GAAP measures, which exclude stock based compensation. Cost of revenues were RMB 328 million, a decrease of seventeen percent year on year due to more efficient budgeting with our IT expenditures despite increasing content procurement costs. As a result, we generated RMB million gross profit and seventy three percent gross margin, which expanded both year on year and sequentially. 05:34 Our sales and marketing expenditures for the second quarter totaled RMB 901 million, rather a flat year on year and as a percentage of revenue it came to seventy five percent, which represented a thirteen percentage point increase from a year ago. Due to a combination of lower revenue base an increased investment in growing the user base of Midu Novels. 05:56 Our R&D expenses were RMB 116 million during the quarter, which was ten percent of revenue, flat compared to a year ago. G&A expenses were RMB million during the quarter, which was over seven percent of revenues in line with historical trends. We made an operating loss of our own RMB two hundred million, which is – we’ve seen the range. After breakeven in Q4 last year, our year to date loss has been the result of our ramp up investment in Midu Novels, excluding which we will profitable in Q2 and for three consecutive quarters now. 06:33 We also expect our overall business including Midu Novels to be operationally profitable in the second half of this year, hence profitable for the full year. For the next quarter, i.e. Q3 of twenty one, we expect revenue to be broadly stable ranging between RMB 1.050 billion to RMB1.1 billion. 06:56 Thank you much. That concludes our prepared remarks today. We are now open for questions. Operator, proceed.
Operator: 07:05 Your first question comes from the line of Thomas Chong of Jefferies. Please ask your question.
Thomas Chong: 07:33 Hi, good evening. Thanks management for taking my questions. My first question is about the advertising outlook in the second half. Management have mentioned in the prepared remarks that the is not so clear at this point. Just want to get some sense with regard to some of the key advertising categories like , e-commerce, and other key categories in terms of the advertising trend in Q3 and Q4 because our guidance are showing some softness on a sequential basis traditionally Q3 should be a better quarter versus Q2. So, just want to get some sense about the most stringent regulatory environment in some of the sectors and how much that affect Q3 and Q4 and when should we expect it to enjoy a sequential growth again? And then my second question is about details and the marketing. Looking that the user engagement is showing good progress per DAU basis, on the other hand, we are also seeing the acquisition cost is also rising very rapidly, so just want to get a sense about the market environment on User acquisition, and how we should think about that going forward? Thank you.
Sai Chi: 09:21 Thank you, Thomas. So regarding our first question, so for the overall outlook for the ad market in the second half, I think overall we remember cautious as industry and the economy may continue to face uncertainties both in terms of economic growth and recovery and as well as in terms of regulatory environment. So, we have witnessed our clients, our advertising partners has been more conservative in terms of ad spending and budgeting. So, I think this will probably continue into the second half. 10:01 Although overall, I think the recent regulatory campaign by the government is a good thing for the long term health and stability of the Chinese economy and the society as the whole and the company, we welcome this development and I think we will continue to strive to meet the higher standard of compliance, but however, I think there will be some near term uncertainties and impact on the overall ad market, especially in terms of advertisers sentiment. 10:33 So, I think that explains the with be in the second half, especially in Q3. In terms of categories, I think for us because we have been doing some of the upgrade and operating efficiency improvement over the last one or two years, and we have pay key account taking a larger share of our revenue as we have our standards when boarding new customers and also because our relationships with the case grow over the years. And also, I think for the second half especially going into year-end the e-commerce season, I think we probably will see increased revenues from the e-commerce players especially in Q4. 11:24 So, regarding your second question, on the sales and marketing, as you have already pointed out, our user engagement costs has been done lot over the last few quarters. Now, it stands at about zero point zero six percent for user per day, and I think that will stand there for the foreseeable future. We don't have any plan to increase that and I think right now the amount of incentives we give to our users, is about right to make sure that they stay with us without incur bigger expenses or loss for us. 11:59 In terms of acquisition costs that mainly due to our increased investment into Midu as we said at the beginning of the year; we plan to at least double the DAU of Midu for twenty twenty one, and so far we are well on track. Midu’s DAU, average DAU has already been over ten million in Q2. So, I think we are going to see twelve, thirteen or fourteen million DAU’s by the year-end. So that's where we have been spending our money. And I think that's a good investment because we are getting very good ROI, very good users from this marketing campaign on the Midu front. 12:39 So, this probably will continue for the second half of the year. And in terms of a longer period for example, what about next year or the year beyond? I think it remains to be seen. It will depend on whether we can still get better ROI and returns from the investment we made on the Midu front. Thank you.
Thomas Chong: 13:03 Thank you.
Operator: 13:08 Your next question comes from the line of Vicky Wei of Citi. Please ask your question.
Vicky Wei: 13:15 Good evening management. Thanks for taking my questions. So would manage will share some color about the latest regulation on data collection, security, and also algorithm recommendation? How will this impact the company in the advertising business? Thank you.
Sai Chi Du: 13:33 Thank you, Vicky. As I said in the previous question that I think overall, we welcome the development in the regulatory environment. I think overall, it's a good thing for the long term health of the economy and the society. And for us, we have kept up with high standards of compliance. 13:57 So overall, I don't think there will be much incremental impact especially to business. As content industry has been on a tightening cycle over the past two years, we have already taken an opportunity to position our business including improving and enhancing our with regard to data privacy and security. So we will obviously continue to closely monitor the development on the regulatory front and make sure we meet our requirements, and we will also update the market accordingly, but as I have said, for us, we don't see any much incremental impact on this front, and we welcome this . Thank you.
Vicky Wei: 14:40 Thank you.
Operator: 14:44 As there are no further questions now; I'd like to turn the call back to the company for closing remarks.
Sai Chi Du: 15:10 Thanks again for your time. If you have any further questions, please do not hesitate to contact us. Have a great day.
Xiaolu Zhu: 15:16 Thank you.
Operator: 15:20 This concludes this conference call. You may now disconnect your line. Thank you.
