CooTek (Cayman) : First Quarter 2021 Earnings Call Transcript

[CTK] - CooTek (Cayman) Inc.

Q1 2021 Unaudited Financial Results

Thursday, June 3, 2021, 8:00 AM ET.

Company Representatives:

Claire Yung, Investor Relations, ICA (Institutional Capital Advisory)

Karl Zhang, CooTek Inc., Chairman, Chief Technology Officer

Robert Cui, CooTek Inc., Chief Financial Officer

Company Participants:

Nelson Cheung, Citi

Steve Silver, Argus Research

Vivian Zhang, Diamond Equity Research

Ken Gao, Tigress Financial Partners

Presentation

Operator: Good day, and welcome to CooTek's First Quarter 2021 Unaudited Financial Results Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Institutional Capital Advisory. Please go ahead.

Claire Yung: Thank you, operator. 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 Technology Officer, and Mr. Robert Cui, Chief Financial Officer. Mr. Zhang will review business operations and Company highlights, followed by Mr. Cui, 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 21-E 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, expects, anticipates, 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. SEC 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; the expected growth of the mobile internet industry and the mobile advertising industry; the expected growth of mobile advertising; expectations regarding the 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 U.S. SEC. All information provided on this call is current as of the date of this call, and CooTek does not undertake any obligation to update such information except as required under law.

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

Karl Zhang: Thank you. Thank you, everyone, for joining our first quarter 2021 earnings call. We have reported our first quarter 2021 results with revenue of US$81.6 million, which was a bit higher than our previous guidance. After the rapid revenue growth in 2020, we have been committed to implementing a balanced approach in consolidating our business fundamental. We are confident that the current focused strategy will result in a robust and a profitable business model targeting at a sustainable growth. We expect that the second quarter revenue will be around US$83 million with a significantly improved bottom line towards profitability.

Firstly, let me still address specifically on the recap of our online literature business.

For Fengdu Novel, our free online literature product in the Chinese market, we have been upgrading the business model with a strong focus on improving user retention rate and ROI.

By leveraging our continued investment in the content resource with our original content platform, Fengdu's Literature Platform, we have continued to enrich the scale and depth of our content ecosystem. As of May 2021, the number of signed authors increased to more than 4,100. Fengdu Literature Platform currently covers 25 major categories of male and female-preferred contents. Besides urban context and ancient romance, modern romance and fantasy are the newly-emerged popular categories.

On the other side, Fengdu Novel has expanded cooperation agreements with well-known corporate partners such as Tadu Literature, YY Novel and Ali Literature, and others. For example, Li Hu, also known as Heavenly Silkworm Potato, a popular online literature author, officially published his new fantasy book, King of All Xiang. Fengdu Novel was the first online literature platform to debut this new book on April 10, 2021.

We have been intensifying the community-driven approach for Fengdu Novel. The average daily reading time per daily active user further grew to approximately 148 minutes in March 2021. The average 30-day new user retention rate of March 2021 increased by 15% than that of December 2020, and the average 90-day new user retention rate of March 2021 increased by 20% than that of December 2020, which also contributed to the steady growth of lifetime value of users on our

platform.

As a result, the operational efficiency further strengthened in the first quarter of 2021. We are encouraged to see the expectation of achieving profitability for Fengdu Novel while keeping a solid and sizable user base.

In addition, our overseas online literature product consistently recorded MAUs close to 1 million. The content inventory exceeded 1,300 books in March 2021 with continuous improvement of the new user retention rate. We are dedicated to gain more market share in the U.S. and the overall global online literature market.

Secondly, we also upgraded our mobile games portfolio and pipeline both in the domestic and overseas markets through internal developments and external investments and partnerships. The revenue and net profit contributed by mobile games business returned to quarter-over-quarter growth. We maintained our strong focus on game types with higher ROI and longer product cycles.

Catwalk Beauty, a casual game designed and released in the global market by our invested game studio, recently reached #1 in the U.S. and other 57 countries and regions on App Store and Google Play Games section.

The success of Catwalk Beauty in the global market stemmed from our R&D capability in gaming and experience in localized operations in the global market. We drove the whole process of the incubation of Catwalk Beauty, from the creation to the development and its final debut.

In addition to the creative gameplay, localized UI design is the crucial factor to the game's outstanding performance. We have brought an enhanced entertainment experience to its users through expertise in game innovation and development.

Catwalk Beauty has attracted a group of loyal fans internationally. We notice that they actively share their game among their friends, taking videos and share to YouTube. The popularity signifies those mobile games developed by us are gaining more market share in the global market.

Looking forward, through a holistic incubation mechanism, which fuels rapid iteration and innovation, we are confident in achieving a large-scale game production and growing exponentially in the global market.

We have further cooperated with third-party content producer partners in the mobile game industry to accelerate the growth of our mobile game business by producing and publishing more high-quality mobile games. We recently invested and cooperated with two game studios in Shanghai. The investment and partnership with experienced industry veterans can further expand our product portfolio and enlarge our business exposure to publishing and distribution of mobile games.

As mentioned during the earnings release call in the previous quarter, our strategy remains stable. We will continue to cultivate the global pan-entertainment content ecosystem and focus on the three key business sectors: online literature, mobile games, and scenario-based content

apps. We are optimistic about achieving steady growth and profitability as the core components of our strategic goals.

With that, I will hand the call to Robert, our CFO, who will walk you through our financial results for the quarter. Thank you.

Robert Cui: Thanks, Karl. Hello, everyone. Thanks again for joining us tonight. We have been concentrated on optimizing the resource allocation to deliver the balanced development strategy. With the continued improvement of the monetization capabilities of our online literature business and the enrichment of the product portfolio with the competitive margin of our mobile games business, we are optimistic about the profitability achievement of our user-oriented content business model. The first quarter of 2021 constituted a good foundation for the execution of the overall business plan.

I'm going to brief our first quarter of 2021. Net revenue was US$81.6 million, a decrease of 24% from US$107 million during the same period last year and a decrease of 20% from US$102.4 million during the last quarter. The decrease was primarily due to the restructuring of our portfolio products.

The net revenues are mainly generated from 3 categories of our content-rich apps: Online literature accounted for approximately 40%, scenario-based content apps accounted for approximately 14%, and mobile games accounted for approximately 45% of the total revenue.

DAUs of the Company's portfolio products were 20.3 million, a decrease of 19% from 25.2 million in March 2020. MAUs of the Company's portfolio products were 58.6 million, a decrease of 34% from 89.2 million in March 2020. DAUs of the Company's online literature products were 7.5 million, an increase of 3% from 7.3 million in March 2020. MAUs of the Company's online literature products were 20.1 million, decreased from 29.1 million in March 2020.

The average daily reading time1 of the key product Fengdu Novel's users was approximately 148 minutes in March 2021, which continued to grow steadily compared with 130 minutes in December 2020.

Our gross profit margin was 89.1%, compared with 95.7% in the same period last year and 93.1% last quarter.

GAAP cost and expenses were about $93.4 million, a decrease of 23% sequentially and a decrease of 20% from the same period last year.

Sales and marketing expenses were US$70.7 million, a decrease of 31% from the same period last year, and a decrease of 31% from last quarter. As a percentage of total revenue, sales and marketing expenses accounted for 87%, compared with 96% during the same period last year, and 100% last quarter. The sequential and year-over-year decrease in sales and marketing expenses as a percentage of total net revenue was primarily due to the optimization of the

1 "Average daily reading time" for any day is calculated by dividing (i) the sum of time spent on reading books on our Fengdu Novel for such day, by (ii) the number of Fengdu Novel users who spent time on reading books for such day. The average daily reading time for any month is calculated by dividing (i) the sum of average daily reading time for each day in such month, by (ii) the number of days in such month.

operational efficiency in relation to the acquisition of new users and the retention of existing users.

R&D expenses increased by 32% year-over-year and increased by 39% sequentially, primarily due to an increase in costs associated with technology R&D staff and share-based compensation expenses. As a percentage of total net revenue, R&D expenses accounted for 11%, compared with 6% during the same period last year and also 6% last quarter.

G&A expenses increased by 68% year-over-year and 43% sequentially. The sequential increase was mainly due to an increase in costs associated with G&A staff and third-party outsourcing fee. The year-over-year increases were mainly due to increases in costs associated with G&A staff, share-based compensation and third-party outsourcing fee. As a percentage of total net revenue, G&A expenses accounted for 7%, compared with 3% during the same period last year and 4% during last quarter.

GAAP net loss was US$12.4 million. Excluding the effects of stock compensation, adjusted net loss (non-GAAP) was approximately US$11.1 million, compared with adjusted net loss (non- GAAP), US$17.3 million last quarter, and adjusted net loss (non-GAAP) of US$8.8 million during the same period last year. The sequential narrowing of the adjusted net loss was mainly due to the decrease in the sales and marketing expenses as a percentage of total revenue, driven by the optimization of the operational efficiency in relation to the acquisition of new users and the retention of existing users.

As of March 31, 2021, we had cash, cash equivalents and restricted cash of about $56.1 million, compared with $49.6 million at the end of 2020. At the same time, we have been committed to delivering a balanced financial approach by improving the overall operating leverage.

On May 18, 2020, we announced a share repurchase program, the 2020 Program, where we are authorized to repurchase our class A ordinary shares in the form of ADSs with an aggregate value of up to US$20 million during the 12-month period starting from May 18, 2020. We expect to fund the repurchases under this program with our existing cash balance. As of March 31, 2021, we had used an aggregate of US$5.9 million to repurchase 1.3 million ADSs under the 2020 Program and recorded as treasury stock.

Looking at the second quarter of 2021, we expect total net revenue to be about US$83 million. This outlook is based on information available as of the date of this press release, and reflects the Company's current and preliminary expectations, which are subject to change in light of various uncertainties, including those related to the ongoing COVID-19 pandemic. As a whole, we are committed to executing our well-structured dedicated growth plan focused on continuously delivering revenue growth and steadily achieving profitability.

Operator, we are now ready to take questions.

Questions and Answers