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Edited Transcript of CTK.N earnings conference call or presentation 20-Aug-19 12:00pm GMT

Q2 2019 CooTek (Cayman) Inc Earnings Call

Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of CooTek (Cayman) Inc earnings conference call or presentation Tuesday, August 20, 2019 at 12:00:00pm 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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* Ivy Liu

Crédit Suisse AG, Research Division - Analyst

* Mon Han Chung

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Yi Jing Wei

Citigroup Inc, Research Division - Research 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 Second Quarter 2019 Unaudited Results 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 the IR website at ir.cootek.com as well as through PR Newswire.

On the call today from CooTek are Mr. Karl Zhang, Chairman and Chief Architect; and Ms. Jean Liqin Zhang, Chief Financial Officer. Karl will be -- Karl will review business operations and company highlights, followed by Jean, 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 everyone that this conference call may contain 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 terminologies such as will, expect, anticipate, future, intends, plans, belief, estimates, confident and similar statements. 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. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. Securities and Exchange Commission.

All information provided on this call is current as of today, and CooTek does not undertake any obligation to update such information except as required under applicable law.

It is now my pleasure to introduce Karl. Karl, 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 second quarter earnings call. The quarter delivered mixed results with both promising progress and growth opportunities and as well as challenges that we have taken very seriously and are addressing as fast and forcefully as we can.

Growth remained strong in the second quarter. The average DAU of our content-rich portfolio apps reached 27.6 million in June, thanks to the continuous investments in our content ecosystem and the optimization of products and operations such as the user recall program. The engagement rate of our portfolio apps continued to grow to 42% in June of this year, up from 39% in March this year, 37% in December and 33% in September last year.

We have been consistently making significant progress by releasing competitive products, retaining our users and actively facilitating interactions with our products.

Our mission is to empower everyone to enjoy relevant content seamlessly. We believe that the global content app market is still in its early stage, and this gives us massive opportunities in both horizontal and vertical areas. We are investing to firmly establish and continuously evolve our content ecosystem in order to achieve long-term competitiveness and user stickiness. For example, Cherry, our female health care and lifestyle community app, has reached a certain amount user retention rate of nearly 60% as we continue to evolve our content ecosystem.

All along, we continue to incubate new content apps to expand our reach across a wide and diverse array of user interests. Our sophisticated growth platform is built by leveraging our unique in-depth user insights.

Starting from -- starting late last year, we began expanding our product offering for the Chinese market, which has shown great growth potential for us in the first half of this year. TouchPal Phonebook is a content-rich app that we released in Chinese market, which integrate multiple content formats such as news feed and short videos.

TouchPal Phonebook online versions regained growth momentum this quarter. This shows just how much growth potential there is for us to expand into and demonstrate our strong execution capability to benefit from these opportunities.

On July 17, we were made aware that some of our global portfolio apps had been disabled by Google from Google Play Store and Google AdMob. We reacted immediately and have been in continuous communication with Google to clarify potential misunderstandings behind this -- behind their action.

Back in early May this year, we started to receive warnings from Google Play. After discussion with Google, we got clarification that it was related to some ad feedbacks in one of our monetization APK. We immediately took action to fix this defect and submitted updated versions to Google Play for validation.

Starting from May 24, we received multiple successful approvals and compliance confirmations from Google Play policy. However, on July 17, we received the accounts disabled notice. After careful investigation, we believe we fixed the ad feedback on a timely basis and got confirmation from Google, and that the disable notice might be the result of some misunderstanding.

It appears that one of our developer team reused some obsolete codes in the old APK for new product features in June. The features are not related to ad activity. We confirmed there was no regression of any of the ad defects, but the code we reintroduced may have created a misunderstanding with Google. Now we were reintroducing ad feedbacks, which we had already fixed.

Our revenue of second quarter was $37.6 million and was negatively impacted by the difficulties that we are experiencing in collecting our considerations from Google. And therefore, our inability to recognize the corresponding advertising revenues for the last 2 months of the second quarter as a result of Google's decision.

The sequential increase in G&A expenses for the second quarter was mainly due to an increase of $4.7 million in the bad -- in bad debt provision, the majority of which was accrued for certain customers such as (inaudible) and (inaudible), who were impacted by Google's decision.

We believe that the impact from the bad debt will be one-off and will primarily be reflected by -- in our second quarter financial results. The current suspension and the removal of our global portfolio apps could impact our user growth as approximately 53% of our new users of our global portfolio apps were acquired through Google Play in the second quarter. However, this number was down from approximately 87% in the first quarter of this year.

As mentioned earlier, we are in continuous communication with Google to clarify any potential misunderstanding. However, the process for appealing such suspension and the removal could be time-consuming and we could not guarantee that this appeal will prevail or that any such suspended or removed applications will be made available again.

Regardless, we are well prepared for either outcomes and have already put in place operational measurements, which we can rapidly roll out and will allow us to continue to acquire new users.

Let me emphasize that Google's action does not impact the ability of our existing users to use our apps and generate ad inventory, and we believe that its impact will be short term.

Our sophisticated user growth capability leverage in our in-depth user insights remain strong and unique. Our fast-growing CooTek ad platform ensures monetization capability in the midterm. We are going to release new apps in the global market that we will cross-sell to our existing users.

With that, I will hand the call to our CFO, Jean, to walk you through our financial results for this 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 am going to walk you through our second quarter financial results.

Now let me start with users. Monthly active user for our portfolio products reached to 65 million in June, up 1.9x from a year ago. Average daily active users for our portfolio products in June reached about 28 million, up 2.8x compared to last year.

Average daily user -- average daily active user on TouchPal Smart Input in June were approximately 144 million, up 15% from last year and MAUs were up 11% compared to last year.

The total revenue was USD 37.6 million, up 33% and includes ads revenue of USD 36.7 million, also up about 33%. Within total advertising revenue for the second quarter of 2019, portfolio products contributed approximately 78%. TouchPal Smart input contributed approximately 6% and the TouchPal Phonebook contributed about 16%.

Turning now to expenses. Our quarter 2 GAAP cost and expenses were nearly USD 52 million, an increase of 31% sequentially and 98% from the same period last year.

Non-GAAP cost and expenses were nearly USD 51 million, an increase of 31% sequentially and 98% year-over-year. As a percentage of revenue, non-GAAP cost and expenses accounted for 135%.

Portfolio products DAU grew 2.8x from the same period last year and 19.5% sequentially.

Sales and marketing expenses increased about 1.1x from same period last year and 19% sequentially. So our effectiveness of grow user base is still effective.

R&D expenses increased by 16% sequentially and 70% year-over-year, primarily due to increased compensations for R&D staff. We ended the quarter with 588 full-time employees, up 52% for last year and 13% from last quarter. R&D employee represent 63% of total employees compared to 63% last quarter and 62% during the same period last year.

G&A expenses increased by 232% sequentially and 241% year-over-year. The increase is mainly due to an increase of about USD 4.7 million in bad debt provision, the majority of which was accrued for certain customers impacted by Google's decision to disable some of our global portfolio products -- applications.

Our gross margin was 89.4%, up from 86.5% during the same period last year and slightly down from 91.2% last quarter.

We had GAAP net loss of USD 14.1 million, representing a 37.6% of net loss margin. Excluding the effect of stock compensation, our adjusted net loss was approximately USD 13 million, representing a 34.4% non-GAAP net loss margin.

As of June 30, 2019, cash and cash equivalents and restricted cash was USD 62.8 million compared to USD 77.3 million as of March 31, 2019. Under the share repurchase program announced on November 26, 2018, the company used an aggregate of USD 10 million to purchase 1.1 million ADS as of June 30, 2019.

Turning now to the revenue outlook. We expect total revenue in the third quarter of 2019 to be about USD 30 million, representing 18% increase year-over-year. And for the whole fiscal year of 2019, we expect the total revenue is about USD 145 million, representing an 8% increase year-over-year. These estimates reflect company's current and 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) Today's first question comes from Tina Long of Credit Suisse.

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Ivy Liu, Crédit Suisse AG, Research Division - Analyst [2]

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This is Ivy on behalf of Tina. So given the incident with Google Play, could management shed more color on the user acquisition plan through other channels to boost the user growth? So any new apps in the development pipeline? And what does the user growth target look like for other channels looking into the second half of 2019 as well as 2020?

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

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Thank you, and I am going to answer these questions. So I think the current suspension and the removals of the company's global portfolio apps could impact our DAU growth as approximately 53% of the new users of our global portfolio apps were acquired through Google Play in the second quarter. So this number was approximately 87% in the first quarter of this year and 90 – it is actually 98% in the fourth quarter of last year.

So that -- yes, in the second quarter, 47% of our new users were acquired from channels other than Google Play such as Apple App Store, OEM (inaudible) stores and other independent stores. The overall unit cost and economics are relatively at the same level with Google Play. So by increasing the user acquisition budget on those channels, we will effectively mitigate the risk of user growth.

And at the same time, we have been in continuous communication with Google to clarify any potential misunderstanding and restore access to its global portfolio of apps, though no specific timeline has been confirmed. Regardless, we are well prepared for either outcome and have already put in place operational measurements, which we can rapidly roll out and will allow us to continue to acquire new users. And so the management team expected that the growth of our DAU will continue in this year, at least in the fourth quarter of this year.

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Operator [4]

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Our next question today comes from Hans Chung of KeyBanc.

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Mon Han Chung, KeyBanc Capital Markets Inc., Research Division - Research Analyst [5]

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So regarding the guidance, so does the guidance reflect the worst case, assuming that there is no revenue from Google, perhaps? And then also -- so what if the appealing result doesn't go well? Let's say, the Google denied appealing. And then -- and what's -- what other -- what kind of options for us to grow in the future, I mean in addition to the other channel for customer acquisition, but any other major impairments? And then following that, what's our current outlook for next year?

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

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Okay. Thanks, Hans. And I'm going to answer this question. So yes, we are in process for appealing for the suspensions and the removals of our apps with Google. Actually, there are the following impacts on the current suspensions and the removals of the company's global portfolio apps. So first, it had adverse impact on our short-term financial results, especially the second and third quarter.

So our projection -- our guidance for the coming third quarter is pretty conservative. And our second quarter financial results reflected such impact already, and we used to project our second quarter revenue to be between $45 million to $50 million. The company was experiencing in collecting its consideration from Google and therefore, inability to recognize the corresponding advertising revenue for the last 2 months of the quarter.

So the - and the sequential increase on the G&A expenses was mainly due to an increase of $4.7 million in bad debt provision, majority of which was accrued for certain customers' influence. And so the management regards that such influence on bad debt is one-off and mainly impacting our second quarter financial results.

And I want to emphasize that Google's action does not impact our existing users to use our apps and generate app inventory, but certain disability of Google AdMob account and certain customers' account influence made it difficult to effectively feel the ad inventory in short term. So this results in decreased ad fill rate, EPPM and ARPU, accordingly. However, we believe that such impact could be offset in the short term by growing our in-house ad serving platform, which is CooTek ad platform.

As I mentioned in previous earning call, that CooTek ad platform filling the ad inventory directly to advertisers was our strategic choice to optimize the revenue concentration and stabilize our monetization for long term. So global -- Google contributed approximately 55% to 60% of our total revenue last year and it narrows down to -- significantly to approximately 25% in the second quarter without considering Google's action.

And meanwhile, the revenue contribution of our CooTek ad platform consistently increased to over 25%. So we are very confident that our other monetization channels, especially CooTek ad platform, will result in even better monetization efficiency.

And secondly, the current suspensions of -- and removals of the company's global portfolio apps could impact our DAU growth as approximately 53% of the new users were acquired through Google Play in the second quarter. So this number was approximately 87% in the first quarter of this year.

So by increasing the user acquisition budget on the distribution channels other than Google play will effectively mitigate the risk of user growth. And our significant -- our sophisticated user growth platform and the backbone and that user insight work for any distribution channel. So the user acquisition unit cost and economics will keep the same level with Google Play. So this has been validated in the second quarter, given other distribution channels contributed approximately 47% of new users.

So to summarize, Google's action impacts our short-term revenue and user growth, especially the second quarter and the third quarter. In the fourth quarter, we are confident to digest most of the negative impact and regain growth momentum for both revenue and user growth. And looking forward, our business will even become more stable and sustainable after this affair.

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Operator [7]

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Our next question today comes from Vicky Wei of Citi.

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Yi Jing Wei, Citigroup Inc, Research Division - Research Analyst [8]

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I have follow-up questions for the second half of 2019. So what -- because of the Google impact, what does management expect about the operating expense in the second half? And also what is the ARPU channel going into the second half of 2019?

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

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Sorry. Can you repeat the question?

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Yi Jing Wei, Citigroup Inc, Research Division - Research Analyst [10]

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Yes. So I have follow-up questions about the second half of 2019. So the first one is due to the Google impact, what does management expect the impact to the operating expense profile? And my second question is what is the ARPU channel of CooTek going into -- the second half of this year?

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Kan Zhang, CooTek (Cayman) Inc. - Chairman of the Board of Directors & Chief Architect [11]

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Okay. Let me answer this question. So first, it's about the ARPU of our apps, especially the portfolio of products. The management expects that the ARPU will remain -- that the ARPU of our portfolio apps for the third quarter will remain the same with the second quarter. And in the fourth quarter, we will regain the growth momentum of the ARPU for our portfolio apps. And we expect that we will recover from the impact that Google's decision made on the revenue and especially the ARPU.

In terms of operational expense, so basically because we are very confident on the growth momentum and our core competency, so we will basically continue to invest to acquire new users. But at the same time, we will invest more to develop our CooTek ad platform, so that we can pick up the ARPU very soon. So -- and that is the current plan.

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Operator [12]

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(Operator Instructions) And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Christian Arnell for any closing remarks.

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Christian Arnell, Christensen & Associates - MD [13]

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Thank you, everyone, for joining our call today. If you have any questions or comments, please don't hesitate to reach out to us. This concludes the call. Good night.

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Operator [14]

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Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.