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Edited Transcript of CTK.N earnings conference call or presentation 7-Mar-19 1:00pm GMT

Q4 2018 CooTek (Cayman) Inc. Earnings Call

Mar 14, 2019 (Thomson StreetEvents) -- Edited Transcript of CooTek (Cayman) Inc. earnings conference call or presentation Thursday, March 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kan Zhang

CooTek (Cayman) Inc. - Chairman of the Board of Directors & Chief Architect

* Liqin Zhang

CooTek (Cayman) Inc. - CFO

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Conference Call Participants

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* Alicia Yap

Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research

* Mon Han Chung

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Shuopeng Gu

Crédit Suisse AG, Research Division - Research Analyst

* Yue Hang Chan

BofA Merrill Lynch, Research Division - Junior Analyst

* Christian Arnell

Christensen & Associates - MD

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Presentation

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Operator [1]

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Good day, and welcome to the CooTek Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

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

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Christian Arnell, Christensen & Associates - MD [2]

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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 Ms. Jean Liqin Zhang, Chief Financial Officer. Mr. Zhang will review business operations and company highlights followed by Ms. 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 would 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 U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intends, plans, believes, estimates, confident and similar statements. CooTek may also make written or oral forward-looking statements in its reports filed with or furnished to the U.S. Securities and Exchange Commission and in its annual report to shareholders, in press releases and other written materials and oral statements made by its officers, directors or employees to third-parties. Any statements that are not historical facts including statements about CooTek's 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 the company's filings with U.S. 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 a law.

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

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

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Thank you, thank you everyone for joining our fourth quarter and the 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 product exceeded our expectations by reaching nearly 17 million in December 2018, up 54% quarter-over-quarter, and the contributing nearly 70% of total revenue.

It only take -- it only took us 5 quarters to grow our portfolio product DAU from just 1 million to nearly 17 million, while maintaining profitability. Considering the relatively short 2-year history of our portfolio product, we're very proud of this result and are confident that we can continue to gain growth momentum. Our revenue for the full year reached $134 million, up 259% from 2017.

We hit a critical milestone in 2018, we believe that the global content app market is promising. And are -- we are on fast track to take advantage of this great opportunities to become a market leader.

As a market leader, we will be able to utilize greater financial benefits in the future. That's why, as I emphasized on the last quarter's earnings call, we set growing our user base rapidly, especially the DAU of our content-rich portfolio product as our first priority at this stage.

We're 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 demonstrates the effectiveness of our strategy to be an AI-driven global content delivery platform.

By leveraging our intact user insights and establish systematic user growth approach, we acquired new users for our content-rich portfolio product more aggressively than we did in the third quarter and still have the average user acquisition unit cost relatively stable. We believe that this demonstrates the sustainability of our user growth capability. Aside from acquiring new user and in order to accumulate DAU even faster, we have been focusing our outlook on improving our product.

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 post, art post and short videos was released on iPhone and demonstrate an impressive user retention rate.

It now ranks as one of the most popular lifestyle app on the App Store in the U.S. 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. And we're also incubating a number of new content-rich apps to capture mobile Internet user's ever evolving content needs. At the same time, we have also devoted significant results towards optimizing user experience, conference recommendation quality and app 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 segment amount user retention rate improved as well.

In summary, with all these efforts on user acquisition, product improvement and optimization, the use of our portfolio products grew from 11 million to 16.9 million, up about 54% sequentially, beyond our original expectation of about 14 million with strong financial outcome.

Our super app TouchPal Keyboard continues to gain grow momentum. The average DAUs of TouchPal Keyboards were 140.8 million in December 2018, an increase of 38% year-over-year.

In the fourth quarter of last year, we signed a pre-load contract with LG, under which LG is going to pre-load TouchPal on some of their smartphones devices. We consider TouchPal Keyboard as a strategic asset, as it contribute very unique value to our fast-growing portfolio products.

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

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

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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 a key -- a few key 2018 financial results. All 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 one year ago. Approximately 158 million people accessed 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 3.9x from a year ago. Average daily active user on our portfolio product in December reached 16.9 million, up 4.8x compared to last year. Average daily active user on TouchPal Smart input in December were approximately 141 million, up 38% from last year. This number represent 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 ad revenue was up about 164%. We continue to see a positive impact from our investment in user growth and ad 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 TouchPal Phonebook contributed approximately 10%. With a faster growing portfolio product user base and a sizable percentage of total revenue we contributed, we have realigned results internally to focus more on growing our content-rich portfolio products. So we expect that the contributions from portfolio product will increase in the future, and with this shift in our focus, we expect the revenue from TouchPal Phonebook will decrease as a percentage of total revenue.

Now turning to expenses. Our quarter 4 GAAP cost and expenses were USD 43 million, an increase of 100% from last year. Cost and expenses accounted for 91% of revenue, an improvement 113% last year and flat sequentially.

We achieved the portfolio product DAU growth of 4.8x year-over-year and up 53.6% sequentially, with sales and marketing expenses up 2.2x 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 as a percentage of total revenue were primarily due to an increased investment in our user acquisitions. We ended the quarter with 498 full-time employee, up 30% from last year and 10% from last quarter. R&D employees represent 62% of total employee compared to 60% last year.

During the fourth quarter, we received about USD 1.5 million in government subsidy as onetime reward for our successful IPO, which we used these funds as a onetime bonus for our employee to thank them for excellent achievement and a successful IPO in 2018.

Our gross margin was 93%, up from 91% last quarter and 73% during the same period last year. We had GAAP net income of USD 4.1 million, representing an 8.7% net profit margin. Excluding the impact of stock compensation, our adjusted net income was approximately USD 4.9 million, representing a 10.4% non-GAAP net profit margin.

We generate USD 13.3 million from operating activity, an increase of 153% compared to USD 5.3 million during the last quarter and compared to outflow from operations of USD 1.2 million for the corresponding period in 2017.

I will now quickly run through a few key full year 2018 financial results, further details can be found in the earnings release. Net revenue for the full year 2018 was USD 134 million, an increase of 259% from USD 37 million 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 53%, TouchPal Smart Input contributed approximately 22%, and the TouchPal Phonebook contributed approximately 15% of total mobile advertising revenue.

Cost and operating expenses for the full year 2018 was 122 -- $124 million, an increase of 100 -- from 16 -- $61 million in 2017. Sales and marketing expenses for the full year 2018 were $80 million, up 3x 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 acquisitions. 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 was $11 million, an increase of 28% from $8.4 million in 2017, primarily due to increase in management staff and administrative fee. 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 USD 10 million, compared to a net loss of USD 24 million 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 31, 2018, cash and cash equivalents were $84.9 million compared to $29.4 million and as of September 30, 2018, and 29 -- $26.7 million as of December 31, 2017. The company used USD 2.5 million to repurchase 311,000 ADS in the fourth quarter. There are no loan outstanding as we repay all bank borrowings in the third quarter of 2018, and our convertible redeemable preferred share will convert into ordinary share in the fourth quarter.

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

Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Alicia Yap of Citigroup.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [2]

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I have 2 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 the reasons for this kind of 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 expense. It does looks like fourth quarter sales and marketing trend came in a bit higher than our estimate, wonder is -- what are the reason? Is that mainly because of higher China marketing spend for the new user acquisition? And then, if you could also share with us the sales and marketing budget for 2019? That will be great.

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

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Thank you, Alicia. I'm going to answer you the first question, and then I will hand over to Jean to answer the second question. So the first question is about the -- so let me get -- elaborate a little bit more on our Q1 guidance. So our Q1 guidance reflected our strategic priority, seasonality and short-term shift in focus, but potentially, all of our revenue is generated from mobile app. So this industry has obvious seasonality. So our guidance is absolutely aligned with most of the mobile Internet companies in the same industry. Secondly, as we mentioned before, with the fast-growing portfolio product user base and the sizable percentage of total revenue they contributed, we have realigned the resources internally to be more focused on growing content-rich portfolio product. With this shift in focus, we expect that the revenue from TouchPal Phonebook will shrink. Our guidance reflect the decrease of the revenue from TouchPal Phonebook, and we believe this is a short-term impact as our portfolio app 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 taking efforts to improve the user experience, including optimizing app load of our products to improve user engagement and the retention rate. Actually from late Q3, we started to test different app loads. In Q4, based on the test result, we decided to reserve some app inventory for future use on our own initiative. Although, this were impacted ARPU, but we believe it is aligned with our strategy. As a result, the user engagement rates, which is DAU over MAU of our portfolio product, improved significantly from 33% to 37% this quarter. And the segment amount 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 ARPU and the DAU growth rate. So here I want to emphasize one point that the history of our portfolio product 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 opportunities 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 ARPU increase. Thank you.

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

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Yes, this is Jean. Regarding your second question in the fourth 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 user. As Karl mentioned, our first priority at this stage is to grow our user base rapidly, considering the great unit cost economics and our systematic growth approach demonstrated. We spend a bit more money to acquire new users with stable unit costs compared to last periods. 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.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [5]

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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%?

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

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At this moment, we're confident that we can keep that -- keep relatively stable user engagement level for this year.

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Liqin Zhang, CooTek (Cayman) Inc. - CFO [7]

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

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Operator [8]

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The next question comes from Ribery Gu of Crédit Suisse.

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Shuopeng Gu, Crédit Suisse AG, Research Division - Research Analyst [9]

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I have 2 questions. My first question is regarding the competition landscape of the portfolio products. So what is the current accomplished landscape in overseas market when promoting our portfolio products? And then who are the major competitors that we're facing? Are they from China? Or are they local companies? And also is that the because of the competition, so we are changing strategic focus to user growth rather than ramp up the monetization that we have for the portfolio products? This is my first question. And 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?

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Kan Zhang, CooTek (Cayman) Inc. - Chairman of the Board of Directors & Chief Architect [10]

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Thank you. So I'm going to answer these 2 questions. So the first question is about the competition. So from my point of view, global contents app market is promising. Based on our data, the amount of time that global users spend on mobile devices every day compared to Chinese mobile phone users are relatively short, but increasing. So we believe that most of the increased time was spent to pursue contents for different verticals. So our strategy is to release multiple content-rich apps to capture mobile Internet users ever evolving content need. So this strategy ensures we release proper app to target more specific user group and grow faster. We didn't notice any significant competition situation change in this quarter. And the only reason that we optimize the app load and the results from our inventory for future use on our own initiatives set to improve user engagement and the retention. And such optimization and the related tasks actually started from Q3 last year. So that benefited (inaudible) with the bank for currency monetization and engagement. So this is for the first question. And the second question is about the job related cost distribution. So there is no significant change in terms of the MAU-based geographical distribution of our portfolio product. So we have approximately 32% MAU from Tier 1 countries, mostly from U.S. And the percentage of East Asia has -- which has relatively high monetization potential increased from 2.4% to approximately 4.3%. And the percentage of South East Asia increased from 7% to 10%, and the South Asia decreased from 18% to 13% approximately. Thank you.

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Operator [11]

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

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Yue Hang Chan, BofA Merrill Lynch, Research Division - Junior Analyst [12]

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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? And how do we see the subsidy amount in this year?

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Liqin Zhang, CooTek (Cayman) Inc. - CFO [13]

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Yes, this is Jean. In the fourth quarter, we received about USD 1.5 million equivalent from government as onetime reward for our successful IPO. And actually, we regard this our reward is onetime thing and it will not re-happen in this year. And actually, company uses money to fund the bonus to our employees for onetime reward for their achievement in last year and the success of our IPO. So this is the general situation about our government subsidy.

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Operator [14]

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

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Mon Han Chung, KeyBanc Capital Markets Inc., Research Division - Research Analyst [15]

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So I have a couple of question. First, for the fourth quarter we have better-than-expected result for portfolio at DAU. So is that upside across the board or is on certain apps? And then following that for 2019, regarding the portfolio app. So what's our -- I mean, the going strategy? I mean, how many new app are you expecting to launch for this year? And then, do you have any focus on any potential app? I think it could be a big app, so you want to put more effort on that? And then also, any color around the geography like where you might be -- have more focus against the others? So that's my question.

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Kan Zhang, CooTek (Cayman) Inc. - Chairman of the Board of Directors & Chief Architect [16]

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Thank you, Hans. So this is Karl, I'm going to answer you this question. So I'm going to merge your questions in -- and answer as one. So first, so I want to simplify -- I want to simply introduce the product development, the model of our company. So based on our intact user impact capability, we have developed a growth foundation for user acquisitions, unified continued recommendation and monetization. And also, we encourage product team to incubate new content-rich app to capture mobile Internet users ever evolving content need. So if the new app meet certain criteria and with some critical products met, such as the business engagement, retention and certain ROI level. So if it graduated from incubation stage and to -- we're going to put more result to grow it, if user base in large scale. So that's how we work. And we have been focusing on improving our existing product line, which covers 5 content verticals, when we IPO, so it's like healthcare, lifestyle, fitness, entertainment and short videos and made good progress. So I have to say that the -- all of the 5 verticals are growing well. And the user engagement rates of our portfolio product improved significantly from 33% to 37% approximately. And here, I want to highlight one app, which is Cherry, so our portfolio add 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 rates. So it now ranks as one of the most popular lifestyle app on the App Store in U.S. So Cherry's success on iPhone demonstrates our product development capabilities and the potential of our systematic user growth approach. So this year, we will be -- we are going to take more effort to grow on iOS platform -- on iPhone platforms. And for example, Breeze, our meditation content app was also released on iPhone. And we are also incubating a number of new content-rich apps and some of them are showing good momentum. So we're expecting to release 2 or more new content app in the first half of this year. Thank you, Hans.

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Operator [17]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Christian Arnell for any closing remarks.

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Christian Arnell, Christensen & Associates - MD [18]

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Thanks 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.

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Operator [19]

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