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CooTek (CTK) Q4 2018 Earnings Conference Call Transcript

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CooTek (NYSE: CTK)
Q4 2018 Earnings Conference Call
March 7, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the CooTek fourth quarter and fiscal year 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your telephone keypad. To withdraw your question, please press * then 2. Please note, this event is being recorded.

I would now like to turn the conference over to Christian Arnell. Please go ahead.

Christian Arnell -- Vice President of Investor Relations

Thank you. Hello, everyone and thank you for joining us today. Our earnings release was distributed earlier today and is available on our IR website at ir.cootek.com and on PR Newswire. On the call today from CooTek are Mr. Karl Zhang, Chairman and Chief Architect, and Miss Jean Liqin Zhang, Chief Financial Officer. Mr. Zhang will review business operations and company highlights followed by Miss Zhang, who will discuss financials and guidance. They will both be available to answer your questions during the Q&A session that follows.

Before we begin, I'd like to kindly remind you that this conference contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are made under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. These forward-looking statements by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates, confidence, and similar statements.

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CooTek may also make written or oral forward-looking statements in its reports filed with or furnished to the US Securities and Exchange Commission and in its annual report to shareholders in press releases and other written materials and oral statements made by officers, directors, or employees to third parties.

Any statements that are not historical facts, including statements about beliefs and expectations are forward-looking statements that involve factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

Such factors and risks include but are not limited to the following -- CooTek's mission and strategies, future business development, financial conditions and results of operations, expected growth of the mobile internet industry and mobile advertisement industry, the expected growth of mobile advertising, expectations regarding demand for and market acceptance of the company's products and services, competition in the mobile application and advertising industry, and relevant government policies and regulations relating to the industry.

Further information regarding these and other risks, uncertainties, and factors is included in the company's filings with the US Securities and Exchange Commission. All information provided on this call is current as of the date of this call and CooTek does not undertake any obligation to update any such information except as required under law.

It is now my pleasure to introduce Mr. Karl Zhang. Mr. Zhang, please go ahead.

Karl Zhang -- Chairman and Chief Architect

Thank you. Thank you, everyone for joining our fourth quarter and fiscal year 2018 earnings call. We're excited about the progress we made during the fourth quarter of last year. Q4 revenue reached $47 million and remarkably, the DAU of our content-rich portfolio products exceeded our expectations by reaching nearly$17 million in December 2018, up 54% quarter over quarter and contributing nearly 70% of total revenue.

It only took us five quarters to grow our portfolio product DAU from just 1 million to nearly 17 million while maintaining profitability. Considering the relatively short two-year history of our portfolio products, we are very proud of this result and are confident that we can continue to build growth momentum.

Our revenue for the full year reached $134 million, up 259% from 2017. We reached a critical milestone in 2018. We believe that the global content app market is promising and we are on such track to take advantage of these great opportunities to become a market leader. As a market leader, we will be able to realize greater financial benefits in the future.

That's why, as I emphasized from last quarter's earnings call, we've set growing our user base rapidly, especially the DAU of our content-rich portfolio product as our first priority at this stage. We are very happy to see such strong DAU growth in the fourth quarter, which exceeded our expectations and will allow us to maintain our leading market position.

The fast-growing DAUs also demonstrate the effectiveness of our strategy to be an AI-driven global content-rich delivery platform that leverages our user insights and established systematic user growth approach. We acquired new users to our content-rich portfolio product more aggressively than we did in the third quarter. And the average acquisition user cost was relatively stable.

We believe that this demonstrates the sustainability of our user growth capabilities. Aside from acquiring new users and in order to accumulate DAU even faster, we have been focusing our efforts on improve our products. We made very good progress on the product side since Q4 2018.

Our portfolio app Cherry, which provides female-oriented content in its newsfeed, including posts, ad posts, and videos, was released on iPhone and demonstrates an impressive user retention rate. It's now ranked as one of the most popular lifestyle apps on the App Store in the US. Cherry's success on iPhone demonstrates our product development capabilities and the potential our systematic user growth approach has.

Breeze, our meditation content app was also released on iPhone. We are also incubating a number of new content-rich apps to capture mobile internet users ever-evolving content needs.

At the same time, we have also devoted significant resources toward optimizing user experience, content recommendation quality, and ad load of our existing products to continuously improve user engagement and user retention. The user engagement, which is DAU over MAU of our portfolio product improved significantly from 33% to 37%. The user retention rate improved as well.

In summary, with all this effort on user acquisition, product improvement, and optimization, DAU of our portfolio products grew from $11 million to $15.9 million, up about 54% sequentially, beyond our original expectation of about $14 million, with strong financial outcomes.

Our app TouchPal Keyboard continues to gain and grow momentum. The average DAUs of TouchPal Keyboard were 140.8 million in December 2018 and increased 38% year over year. In the fourth quarter of last year, we signed a preload contract with LG, under which LG is going to preload TouchPal on some of their smartphone devices. We consider TouchPal Keyboard as a strategic asset, as it contributes very unique value to our fast-growing portfolio products.

With that, I will hand over the call to Jean to walk you through the financial results for the quarter.

Jean Liqin Zhang -- Chief Financial Officer

Thank you, Karl. Thanks, everyone for joining us on the call today. I'm going to walk you through our fourth quarter financial results and a few key 2018 financial results. Our comparisons are on a year over year basis, unless otherwise noted.

Now, let's start with users. We ended December with approximately 237 million people using our global products, up 50% from a year ago. Approximately 158 million people assess our global products each day on average in December, up 50% from the prior year. Monthly active users on portfolio products reached 46.1 million in December, up 3.9 times from a year ago. Average daily active users on our portfolio products in December reached 16.9 million, up 4.8 times compared to last year.

Average daily active users on TouchPal's Smart Input in December were approximately 141 million, up 38% from last year. This number represents about 54% of 191 million monthly active users. The MAU was up 29% compared to last year.

Total revenue in the fourth quarter was up 147% while app revenue was up about 164%. We continue to see a positive impact from our investment in user growth and app monetization. We estimate that of the total advertising revenue for the fourth quarter of 2018, portfolio products contributed approximately 70%. TouchPal Smart Input contributed approximately 20% and the TouchPal Phonebook contributed approximately 10%.

With a faster-growing portfolio products user base and a sizable percentage of total revenue contributed, we have realigned resources internally to focus more on growing our content-rich portfolio products. So, we expect that the contribution from portfolio products will increase in the future and with shifting our focus, we expect revenue from TouchPal Phonebook will decrease as a percentage of total revenue.

Now, turning to expenses, our quarter four GAAP costs and expenses was $43 million US, an increase of 100% from last year. Costs and expenses accounted for 91% of revenue, an improvement from 113% last year and flat sequentially. We achieved a portfolio product growth of 4.8 times year over year and up 53.6% sequentially with sales and marketing expenses up 2.2 times year over year and 40% sequentially.

DAU also grew at a faster pace than sales and marketing expenses. The sequential and year over year increase in sales and marketing expenses is a percentage of total revenue were primarily due to an increased investment in our user acquisitions.

We ended the quarter with 498 full-time employees, up 30% from last year and 10% from last quarter. R&D employees represent 62% of total employees compared to 60% last year. During the fourth quarter, we received about $1.5 million US in government subsidy for our successful IPO which we used as a one-time bonus for our employees to thank them for excellent achievement and a successful IPO in 2018.

Our growth margin was 93%, up around 91% last quarter and 73% during the same period last year. We had adjusted net income of $4.1 million US, representing an 8.7% net profit margin. Excluding the impact of stock compensation, our adjusted net income was approximately $4.9 million US, representing a 10.4% non-GAAP net profit margin. We generate US dollars of $13.3 million from operating activity, an increase of 153% compared to $5.3 million US during the last quarter and compared to outflow from operations of $1.2 million for the corresponding period in 2017.

I will now quickly run through a few key full year 2018 results. Further details can be found in the earning release. Net revenue for the full year 2018 was $134 million US, an increase of 259% from $37 million US in 2017. Mobile advertising revenue for the full year 2018 was $131 million, an increase of 275% from $35 million in 2017. Portfolio products contributed approximately 63%. TouchPal Smart Input contributed approximately 22% and the TouchPal Phonebook contributed approximately 15% of total mobile advertising revenue.

Cost and operating expenses for full year 2018 were $24 million, an increase from $16.1 million in 2017. Sales and marketing expenses for the full year 2018 were $80 million, up 3 times year over year. As a percentage of total revenue, sales and marketing expenses accounted for 60%, an increase from 54% in 2017, primarily resulting from increased investment in user acquisition.

R&D expenses for full year 2018 were $19 million, an increase of 50% from $13 million in 2017, mainly due to increased cost associated with technology R&D staff. As a percentage of total revenue, R&D expenses accounted for 14%, down from 35% in 2017. G&A expenses for the full year were $11 million, an increase of 28% from $8.4 million in 2017, primarily due to an increase in management staff and administrative team. As a percentage of total revenue, G&A expenses accounted for 8%, a decrease from 22% in 2017.

Gross margin for the full year 2018 was 89% compared to 46% in 2017. Net income for the full year 2018 was $10 million US, compared to a net loss of $24 million US dollars in 2017. Our adjusted net income was $12.7 million compared to an adjusted net loss of $21.2 million in 2017. As of December 31st, 2018, cash and cash equivalence were $84.9 million compared to $29.4 million as of September 2018 and $26.7 million as of December 31st, 2017.

The company used $2.5 million US to repurchase 311,000 ADS in the fourth quarter. There are no loans outstanding as we repaid all of our borrowings in the third quarter of 2018 and our convertible redeemable preferred shares were converted into ordinary shares in the fourth quarter.

Turning now to the revenue outlook, we expect a total revenue in the first quarter of 2019 to be between $40 million US and $42 million US, representing an 82% to 92% increase year over year. These estimates reflect the company's current and preliminary view, which is subject to change.

Operator, we are now ready to take questions.

Questions and Answers:

Operator

We will now begin the question and answer session. To ask a question, you may press * then 1 on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster.

The first question comes from Alicia Yap of Citigroup. Please go ahead.

Alicia Yap -- Citigroup -- Analyst

Good evening, Karl and Jean. Thanks for taking my questions. I have two questions. Number one is related to your first quarter guidance. So, I understand there could be some first quarter seasonality, but could you elaborate a little bit on the reasons for these lower than expected revenue guidance and how should we be thinking about the overall revenue growth rate for the full year?

The second question is related to the sales and marketing spend. It does look like fourth quarter sales and marketing spend came in a bit higher than our estimate. I wonder what are the reasons? Is that mainly because of higher channel marketing spend for the new user acquisition? Then if you could also share with us the sales and marketing budget for 2019, that would be great. Thank you.

Karl Zhang -- Chairman and Chief Architect

Thank you, Alicia. I'm going to answer you the first question and then hand it over to Jean to answer the second question. The first question is about the -- let me elaborate more on our Q1 guidance. So, our Q1 guidance reflected our strategic priority, seasonality, and short-term shift and focus. But potentially, all of our revenue is generated from mobile apps. This industry has obvious seasonality. Our guidance is absolutely aligned with most of the mobile internet in a safe industry.

Secondly, as we mentioned before, with the fast-growing portfolio products user base and the sizable percentage of total revenue that contributed, we have realigned the resources internally to be more focused on growing content-rich portfolio products. With this shift in focus, we expect that the revenue from TouchPal Phonebook will shrink. Our guidance reflects the decrease of the revenue from TouchPal Phonebook. We believe this is a short-term impact as our portfolio apps are growing very fast.

Thirdly, as I mentioned at the beginning and in the last quarter's earnings call, we set our first priority at this stage to grow our user base rapidly. We have been making efforts to improve the user experience, including optimizing ad load of our products to improve user engagement and the retention rate.

Actually, from late Q3, we've started to test different ad loads. In Q4, based on the types of results, we decided to reserve some as inventory for future use on our own initiatives. Although this will impact [inaudible], we believe it is aligned with our strategy. As a result, the user engagement rate, which is DAU over MAU of our portfolio product, improved significantly from 33% to 37% this quarter. The second amount, the retention rate, improved as well.

So, this helped us to reach outperforming DAU growth and we are expecting stronger DAU growth this year. We are very satisfied with the balance of current [inaudible] and the DAU growth rate.

Here, I want to emphasize one point, that the history of our portfolio products is relatively short. We believe that the global content app market is promising and we are on the fast track to take advantage of this great opportunity to become a market leader. As a market leader, we will be able to realize greater financial benefit in the future. As for 2019, we are confident that we can achieve high year over year growth rate with the strong DAU growth and the ads will increase.

Jean Liqin Zhang -- Chief Financial Officer

Yeah. This is Jean. Regarding your second question, in the third quarter, we spent $31.6 million on sales and marketing expenses, representing 67% of our total revenue, slightly above our original plan. Most of the cost was spent on acquiring new users.

As Karl mentioned, our first priority at this stage is to grow our user base radically, considering the great unit economics and our systematic growth approach demonstrated, we spend a bit more money to acquire new users with stable unit costs compared to last period. As a result, the DAU grew from 11 million to 16.9 million, which is beyond our estimation of 14 million originally. We are actually very happy with this result.

Alicia Yap -- Citigroup -- Analyst

Thank you, Jean. Any color for the spend for 2019? And then Karl, to follow-up on your DAU/MAU, the engagement ratio, will 2019 be similar with the fourth quarter at like 36%, 37%? Thank you.

Karl Zhang -- Chairman and Chief Architect

At this moment, we are confident that we can keep relatively stable user engagement levels for this year.

Jean Liqin Zhang -- Chief Financial Officer

In the fourth quarter, you can see that our engagement level improved to be around 37%. We have the confidence to remain stable. For the percentage of sales and marketing compared to the total revenue, in general, we will keep the similar unit economics compared to 2018. Of course, under the condition that we will grow our use base as the first priority. At the same time, we'll control the financial results and balance them.

Alicia Yap -- Citigroup -- Analyst

Thank you.

Operator

The next question comes from Ribery Gu of Credit Suisse. Please go ahead.

Ribery Gu -- Credit Suisse -- Analyst

Hi, management. Thanks for taking my questions. I have two questions. My first question is regarding the competition landscape of the portfolio products. So, what is the current competition landscape in the overseas market when promoting our portfolio products and who are the major competitors we're facing? Are they from China or are they local companies? Also, is that the cost of the competition, so we are changing our strategic focus to user growth rather than demonetization that we have for the portfolio products. This is my first question. My second question is about the geographic distribution for our portfolio products. Can we get some color about how much DAU or MAU are from developed areas like Europe and North America? Thank you.

Karl Zhang -- Chairman and Chief Architect

Thank you. I'm going to answer these two questions. The first question is about the competition. From my point of view, global content app market is promising. Based on our data, the amount of time that global users that are mobile devices every day compared to Chinese mobile phone users are relatively short but increasing. We believe that most of the increased time was explained to consume content for different verticals.

Our strategy is to release multiple content-rich apps to capture mobile internet users' ever-evolving content needs. This strategy will release proper apps to target more user groups and the growth of them. We didn't [inaudible] and the competition situation change in this quarter. The only reason we optimized the ad load and the reserve of ad inventory for future use is to improve user engagement and retention. Such optimization, the related task actually started from Q3 last year. So, this is for the first question.

The second question is about the vertical distribution. There is no specific change in terms of the MAU geographical distribution of our portfolio products. We have approximately 32% MAU from tier one countries, mostly from US. The percentage of East Asia, which has a relatively high monetization potential, increased from 2.4% to approximately 3%. The percentage of Southeast Asia increased from 7% to 10% and South Asia decreased from 18% to 15% approximately. Thank you.

Ribery Gu -- Credit Suisse -- Analyst

Thank you, management.

Operator

The next question comes from Emerson Chan of Bank of America Merrill Lynch. Please go ahead.

Emerson Chan -- Bank of America Merrill Lynch -- Analyst

Hi, management. I just have one question regarding the big jump on the other operating income in Q4. I think it is related to the government subsidy, but can we elaborate more about it. How do we see the subsidy amount in this year? Thank you.

Jean Liqin Zhang -- Chief Financial Officer

Yes, this is Jean. In the fourth quarter, we received about $1.5 million US equivalent from government as one-time reward for our successful IPO. Actually, we regard award as one-time. So, it happened in this year. Actually, the company used this money to fund the bonus to our employees for one-time rewards for their achievement last year and the success of our IPO. This is the general situation about the government subsidies.

Emerson Chan -- Bank of America Merrill Lynch -- Analyst

Thank you. That's helpful.

Operator

The next question comes from Hans Chung of KeyBanc Capital Markets. Please go ahead.

Hans Chung -- KeyBanc Capital Markets -- Analyst

Thank you. Good evening, Karl and Jean. Thank you for taking my questions. I have a couple questions. First, for the fourth quarter, we have better than expected results for portfolio app DAU. So, is that the upside across the board or is it on certain apps? Following that, for 2019 regarding the portfolio app, what's the growing strategy?

How many new apps are you expecting to launch for this year? Do you have any focus on any potential apps? It could be a big app. So, you want to improve more effort on that? Then also, any color around the geography, like where you might have more focus against any others? That's my question.

Karl Zhang -- Chairman and Chief Architect

Thank you, Hans. I'm going to answer your question. I'm going to merge your answer as one. So, first, I want to simply introduce the product development model of the company. Based on our user insight capability, we have developed a growth foundation for user acquisition, unified content recommendation, and monetization.

Also, we encouraged the product team to incubate new content-rich apps to capture mobile internet users' ever-involving content needs. So, if the new app meets a certain criteria and with some critical product matches, such as the user engagement, retention, and assessing ROI level, so, it has graduated from incubation stage and we are going to put more results to growing its user base in the large scale. That's how it works.

We have been focusing on improving our existing product line, which covers five content verticals when we [inaudible]. So, it's like healthcare, lifestyle, fitness, entertainment, and short videos, and it made good progress. So, I have to say that all of the five verticals are going well. And the user engagement rate of our portfolio products improved significantly from 33% to 37%, approximately.

Here, I want to highlight one app, which is Cherry. Our portfolio app Cherry, which provides female-oriented content in its newsfeed, including posts, ad posts, and short videos, was released on iPhone and demonstrated impressive user retention rate. So, it now rates as one of the most popular lifestyle apps on the App Store in the US. So, Cherry's success on iPhone demonstrates our product development capabilities and the potential of our systematic user growth approach.

So, this year, we are going to make more efforts to grow on the iOS platform. For example, Breeze, our meditation content app was also released on iPhone. We are also incubating a number of new content-rich apps and some of them are showing good momentum where it's starting to release two or more new content apps in the first half of this year. Thank you.

Operator

Again, if you have a question, please press * then 1 on a touchstone phone. This concludes our question and answer session. I would like to turn the conference back over to Christian Arnell for any closing remarks.

Christian Arnell -- Vice President of Investor Relations

Thank you, everyone for joining the call tonight. That concludes the call. If you have any questions or comments, please don't hesitate to reach out to any of us. Thank you and good night.

Operator

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

Duration: 36 minutes

Call participants:

Christian Arnell -- Vice President of Investor Relations

Karl Zhang -- Chairman and Chief Architect

Jean Liqin Zhang -- Chief Financial Officer

Alicia Yap -- Citigroup -- Analyst

Ribery Gu -- Credit Suisse -- Analyst

Emerson Chan -- Bank of America Merrill Lynch -- Analyst

Hans Chung -- KeyBanc Capital Markets -- Analyst

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