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spk04: Hello, ladies and gentlemen. Thank you for standing by for the third quarter 2020 earnings conference call for the Q2 Chow Inc. At this time, all participants have been in listen-only mode. After management's remarks, there will be a question and answer session. Today's conference call is being recorded. I will now turn the call over to your host. Please go ahead, sir.
spk00: Thank you very much. Welcome everyone to the third quarter of 2020 Earnings Conference Call of Xu Toutiao Inc. The company's financial and operational results were released by Newswire Services earlier today and have been made available online. You can also view the earnings press release by visiting the IR section of our website at ir.xutoutiao.net. Participants on today's call will include our CEO, Mr. Eric Tan, and our CFO, Mr. Xiaolu Zhu. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please note that Udaltel's earnings press release and this conference call include discussions of unauthentic GAAP financial measures as well as unauthentic non-GAAP financial measures. Udaltel's press release contains a reconciliation of the unauthentic non-GAAP measures to the I will start by reading out Eric's commentary on the business. Thank you, Sajee, and thanks everyone for joining today's conference call. We are delighted to see the resilience of our business as reflected in the results of the third quarter. Our focus for the year continues to be on the underlying profitability of the business as we go through a tough market and regulatory backdrop partly due to the COVID pandemic. We have remained agile as a business while facing some uncertainties and changes in the operational environment this year. And we are pleased to see our efforts and perseverance bearing fruit in a form of consistently improving profitability. This has been achieved as a result of a combination of initiatives. Firstly, our marketing expenditures have followed strict ROI requirements to make sure that they are yielding satisfactory returns. For this, we look at Hughes Acquisition, and user retention separately, and in combination to discern the discrepancies in constant search for room to further optimize. This perspective has been a driver behind the amount and timing of our user acquisition. As this is an important part of our daily operation, we have become structurally more efficient as a business, and this will set a solid footing for long-term growth. Within our expenses, we have also taken a closer look at other line items, which are relatively smaller, and previously had not attracted enough of our attention, such as server bandwidth costs, as well as our budgeting for headcounts. These have proven to be another meaningful source of efficiency gain. Our disciplined approach towards expenses has been instrumental in protecting our shareholder value during tough times and will continue to serve us as we reemerge as the tide turns. In the short term, it does mean some downward pressure on our DAU and MAU metrics. We have mentioned in our previous call that our applications had been briefly taken off the app stores at the beginning of Q3 as a result of the CCTV program. Despite being brief, the event did make an active impact on the number of active users on our platform, as well as user time spent. Although this is the lesser factor in comparison to our budgeting initiatives behind the weak DAU and MAU trends, We took the opportunity to recalibrate our strategy towards our content and user ecosystem development. Providing loyalty points has been an effective marketing strategy in attracting user attention for us to scale up our business in our early days. It helps increase user activeness and stickiness, but it is only icing on the cake on top of content. Ultimately, we want content to be the main draw for our users, which is why we have consistently invested into generating better and more original content while reducing loyalty points. Our R&D effort into smartening algorithms has also helped us reduce loyalty points rewarded in terms of both absolute dollar amount and on a per-DAU per-day basis, a measure that has halved year-on-year. Given the magnitude and swiftness of the loyalty points reduction, our DAU in Q3 has experienced weakness which we expect to continue into Q4. However, we are pleased to observe that our pool has held up reasonably well, suggesting we are capturing and retaining high-value customers. Since last year, Medoo has emerged as an important strategic pillar for us. It has made a material contribution to our growth and ecosystem building. We have been focused on consistently improving user experience and investing in the quality and diversity of content, which has led to improved user retention. We successfully explored alternative business models on monetization for Midu, such as the membership program and brand advertising, all of which have created durable incremental revenues. In addition to our strategic cooperation with Quechua on the mini-drama series, which we talked about last time, we have also entered into several content cooperation arrangements with key content providers and players in the online literature market. This will further strengthen our platform in the online literature space and position us well for future growth. Midway is poised to pursue the next stage of expansion in a new year. We will continue to explore diversifying monetization avenues to enhance the return profile of the business, while employing a disciplined and targeted approach towards user acquisition with the goal of nurturing a robust and healthy ecosystem. In terms of outlook for the fourth quarter and beyond, We will continue to manage our business prudently, balancing sustained growth and profitability. We expect to be operationally breakeven in the fourth quarter on a non-GAAP basis, which will mark the first time we break even since IPO. Although we have consistently improved our unit economics in comparison to a year ago, there is always more to be done. We remain squarely focused on driving better returns to our investments. with the objective of achieving full-year profitability next year while maintaining a stable use base overall. As we continue to improve the operational efficiency, we see a balanced and promising path towards growth and profitability for the coming years. Thank you very much. This concludes Eric's remarks, and I will now turn the call over to our CFO Xiaolu.
spk01: Thank you, Eric and Saichi. And again, thank you everyone for joining today's call. Let me first review our financial results with you before providing outlook for the fourth quarter and next year. Our net revenues in the third quarter were RMB 1 billion 130 million with an hour pool of RMB 31 cents. Our MAU was 121 million. As Eric mentioned, the change in our DAU and MAUs has been the result of several factors, but most notably our active initiatives to drive more operational efficiency and a more robust user and content ecosystem. We have sharpened our focus on profitability this year on our way to achieving breakeven. This has seen optimization through our entire budgeting process, so let's take a closer look at costs and expenses. Please note, I will refer to non-GAAP measures. Cost of revenues were RMB 367 million in the third quarter of 2020, a decrease of 26% from the third quarter of 2019. Part of this reduction was the direct impact of revenue adjustment on variable content costs, but another part was due to our disciplined approach towards managing the relatively fixed components such as bandwidth server costs. As a result, our gross profit was RMB 763 million in the quarter, a decrease of 16% year-on-year, while our growth margin improved year-on-year from 65% a year ago to now 67%. As Eric mentioned, we made significant savings in sales and marketing expenses, which came in at RMB 679 million, less than half compared to a year ago. Both user engagement and user acquisition expenses saw the same magnitude of reduction and have come down to RMB 265 million and RMB 386 million, respectively. Overall, sales and marketing expenses as a percentage of revenues were 60% in the third quarter, in comparison to 106% a year ago, which represents a significant improvement. Our ARPU in the third quarter was RMB 31 cents. largely stable throughout the year against a difficult backdrop. Maintaining a similar level of monetization despite much less incentives and loyalty points for ad clicks is evidence that we have been delivering higher quality returns to our advertising customers while keeping the users who are satisfied with the experience on our apps and are truly interested in our content. Our R&D expenses were R&B 181 million, which represents 16% of net revenues, broadly in line with the past few quarters. Our continued but disciplined investment into R&D will be one of the key drivers for our future growth. General and administrative expenses were RMB 36 million, which represented a reduction of 28% year-on-year. This is another area where we managed to extract savings by running a more efficient and linear operation. As a result of our efforts on both the top line and cost management, our profit margin are at their best since IPO, with operating loss ratio improved to 9.7% in the quarter, a consistently positive trend characterizing this year. In the context of a moderate revenue base in the third quarter, this is strong testimony to what we have achieved against the odds. MeDo continues to be a focus for our investment into growing the franchise, and we will push on all fronts in Q4 and next year, including richer content, close strategic collaborations with our partners, strategies to better acquire and retain users, as well as new and innovative business opportunities. Taking into consideration of the continued investment in content and potentially ramping up the pace for user acquisition on the MeDo side to drive forward the business, we still expect to be operationally breakeven in the fourth quarter this year. We expect our total revenues to recover to RMB 1.23 to 1.25 billion in the fourth quarter, while we keep our standards high on quality growth and better unit economics. We remain committed to further improving our operational efficiency as we have achieved consistently over the past several quarters, and we expect this trend to continue in the fourth quarter of 2020 and beyond. This concludes today's prepared remarks. Again, thank you very much. We are now open for questions. Operator, please proceed.
spk04: Thank you so much. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, you will need to press star and 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Again, it's star and 1 if you wish to ask a question. And our first question comes from the line of Vicky Ray from City. Vicky, the line is now open.
spk03: Good morning, management. Thanks for taking my questions. My questions are about Moodoo. So what does management think of the CAU target for the 2020 and 2021? And also, what is the management view on the competition landscape for the online reading industry? Thank you.
spk01: Thank you, Vicky. Regarding the guidance and outlook for Mido, I think we see a quite stable user base and improved monetization in the second half of this year. And as we took a more balanced approach for the entire company between growth and profitability, I think it's more or less applied to Midoo as well, although we do have bigger plans for Midoo for Q4 and next year. And the year-end target is to get to over 8 to 9 million in DAUs for Midoo and a stable output in line or slightly better than the rest of the company. This year, we made significant investment in content. especially proprietary content, as well as collaborations with other content providers. So as we plan to keep investing, as we believe that only a healthy content ecosystem can retain the users over the longer term, and a proprietary platform enables us to further interact with our users and to use real-time user data for quality analysis and to give real-time feedback to the authors. So the quality of the content and the right match of authors, content, and readers are the key to our long-term success for any content-based business. So competition-wise, I think we are seeing more players getting into the free literature market this year, but this further proves the value of this sector, and we welcome more players to make this a robust and healthy industry. And as we have said before, we believe the free literature market is much bigger compared to the traditional pay-to-read model. So there will always be competition from the incumbent as well as newcomers. However, our head start and experience in user acquisition, monetization, and a healthy content ecosystem make us uniquely positioned in this market, and we will continue to be one of the leading players in this market. Thank you.
spk04: Thank you. Thank you so much. Once again, ladies and gentlemen, if you wish to ask a question, it's star and one on your telephone. And your next question comes from the line of Thomas Chung from Jefferies. Thomas, your line is now open.
spk02: Good morning, management. Thank you for taking my question. I'm asking on behalf of Thomas. Can management share your view on the advertising market sentiment in 2021, and maybe can you also share on the competitive landscape? Thank you.
spk01: Okay, thank you. I think for the second half of 2020, we have seen the market start to pick up compared to the first half, and we expect this trend to continue. For us, because of the CCTV incident earlier in Q3, that caused our application to be taken off the app stores for about two weeks. So we have observed some negative impacts on our business operationally and financially due to this in Q3. But we do have seen strong demands from our advertising partners across different business sectors for Q3 and Q4. As we have said in the preparing remarks, we see revenue continue to recover going into Q4. So overall, I think the market is gradually picking up back to the level we have seen last year, back to the level before the pandemic. And I think this trend will continue in Q4 and probably going into next year. And as we have said before, I think our strengths in the performance-based ads will help us to get through difficult times as our customers are increasingly looking for direct and more measurable results. So that's why we are quite confident that we will continue to see revenue recovery and growth in Q4 and the next year for CheetoTel. Thank you.
spk04: Thank you. Thank you so much. Once again, ladies and gentlemen, if you wish to ask a question, it's star and one on your telephone keypad. As there are no further questions, now I'd like to turn the call back over to the company for the closing remarks.
spk00: Thanks again for joining today's call. And if you have any further questions, please don't hesitate to reach out to any of us. Thank you and goodbye.
spk04: This concludes today's conference call. You may now disconnect your lines.
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