Qutoutiao Inc.

Hello, ladies and gentlemen. Thank you for standing by for the first quarter 2021 earnings conference call for Kutotiao Incorporated. At this time, all participants are in a listen-only mode. After management's remarks, there will be a question and answer session. Today's call is being recorded. I will now turn the call over to your host, Saiki Liu. Please go ahead, Saiki.

Thank you very much. Welcome, everyone, to the first quarter of 2021 earnings conference call of Kutotiao 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 IRR section of our website at irr.qitotiao.net. Participants on today's call will include our CEO, Mr. Eric Tan, and our CFO, Mr. Xiao Lu 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 GWR's earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. GWR's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will start by reading out Eric's commentary on the business. Thank you, Saichi, and thanks, everyone, for joining today's conference call. After a year of adjustment, which we initiated last year following meaningful changes in the operational environment triggered by COVID-19, as well as our thinking in terms of how we can better position the business going forward, we started 2021 with a healthy and balanced portfolio of applications at various stages of development. After several quarters of consistent effort and execution, the business overall is today on a much stronger financial footing to march forward. We will continue to operate our business more efficiently while stepping up our growth initiatives. A very important pillar of growth for us today is Medium Novels, which has been the pioneer and a leader of free online literature industry. Following the latest round of financing, as we have announced in our last earnings release, we embark on a new phase of significant investment in growing the Medium franchise. We are now strategically collaborating with Kuaishou in mini TV series or otherwise known as short drama series where we leverage our in-house produced IP to create short clips based on rich and engaging storylines. It's an experiment for the expansion of IP value and a way for more users to come to know Mido as a brand and appreciate the quality of work Mido has to offer. China Literature has been leading the overall online literature industry for years and is reputed for creating and curating the highest quality literature works. We began to partner with them on the content side since Q4 last year to expand the diversity and the scope of quality works available to our users. Given the high quality of China Literature's work and the fact that many have been made available on a free online literature platform for the first time, our users are enjoying more engaging reading experiences, and as a result, we have observed better user retention trends. We continue to nurture our in-house editor team to drive differentiated content, adding where otherwise lacking, as part of our overall strategy to provide the most comprehensive and the richest of free online literature offerings. Remember last year, we adjusted our product positioning by slashing loyalty points and parting ways with users who were essentially not content-oriented. It caused a near-term impact to our business, but we noted that underlying economics turned out to be much improved. To be content-led or content-driven has been the overarching shift for us. MeDo traditionally with little loyalty points has been at the forefront of this drive and provided us with a strong engine to accelerate our overall transition. Having a more unified and clearer target user profile is also conducive to our user acquisition strategy, which is handled by the shared middle office. With better brand recognition, better content, more effective user acquisition, and better economics, we're seeing good results coming from Midoo, which now has peak DAU getting over 10 million in the second quarter, and the revenue is doubling on a year-on-year basis. Elsewhere in a business has been characterized by operating efficiency and improving margins and profitability. Our sequential revenue trend is, in fact, quite a bit better than what weak Q1 seasonality would typically dictate. A leaner operation is going to benefit us longer term as we can now turn our focus outward to capture opportunities in the marketplace and leverage our well-structured and efficient corporate infrastructure. For the four-year of 2021, we remain committed to our balanced approach towards growth and profitability while we further develop and grow our portfolio of applications. And we remain confident of achieving four-year group-level profitability. Thank you very much. This concludes Eric's remarks, and I will now turn the call over to our CFO, Xiaolu.

Thank you, Eric, and thank you again. Thank you, everyone, for joining today's call. Let me first go through financial highlights with you before providing outlook for the next quarter and the rest of the year. Our net revenues for the first quarter were RMB $1,291,000,000 with our pool of RMB $0.45 and quarterly average DAU of $32,000,000 and MAU of $133,000,000, rather flattish sequentially. As we came off the peak season of Q4 and Q1 being the traditional low season for advertising due to Chinese New Year, this indicates underlying stability and recovery of our overall business. Let's look at cost and expenses in a bit more detail. Please note, I will be referring to non-GAAP measures which exclude stock-based compensations. Cost of revenues were around 380 million, a decrease of 17% year-on-year. due to more efficient budgeting with our IT expenditures despite increasing content procurement cost. As a result, we generate RMB 910 million gross profit on 71% gross margin, which is a 3% to 4% margin expansion both year-on-year and sequentially. Our sales and marketing program has been well managed as we have seen better results with smaller expenditures. For the first quarter, the total amount was RMB 798 million. a 24% reduction year-on-year. And as a percentage of revenues, it came to 62%, which represented a 13 percentage point improvement from a year ago. Our R&D expenses were RMB 137 million during the quarter, which was 11% of revenues in line with the previous quarter and a 4 percentage point decrease in comparison to a year ago. Given our streamlined R&D teams, G and A expenses were RMB 61 million during the quarter, which was just under 5% of revenues, in line with the range we observed in recent quarters. Since we broke even during the fourth quarter of 2020, which was the first quarterly operating profit since IPO, we have maintained good cost discipline, and for the first quarter of 2021, we incurred a very small operating loss of RMB 54 million, with operating loss ratio of just 4.2%. Coming off the Q4 peak season and despite the increased investment in Midoo, this is a strong result and gives us confidence towards our financial outlook for the whole year. We continue to see improving unit economics, including Midoo, which historically has offered little loyalty points. The rest of the business has achieved both better output and significantly reduced user engagement expenses. It's another result of mechanical reduction of loyalty points awarded. but rather our strategic repositioning of the business, which we believe is a much stronger and healthier basis to push forward. As Eric mentioned, it is a key part of our growth strategy, and we have entered a new phase of enhanced investment immediately after the latest run of financing. The relevant segment represents great long-term runway for us. we are investing more into every aspect of it, from content and IP creation to user acquisition. Together with our strategic partners, which are all leading players in their respective fields, we are seeing promising trends and results meeting our expectations. Monetization efficiency in terms of our pool has consistently improved. Better content and algorithms have allowed us to generate improving user retention rates. which are key to the virtuous cycle we are nurturing for MEDU. We will maintain a disciplined approach with the all necessary investments into MEDU as we have with the financial management with the rest of the business. And we are confident that we will be able to double MEDU's revenues and by year end. After successfully executing a combination of strategic and financial initiatives over the past few quarters, we feel well positioned with the current profile of the business. We expect the business in terms of DAU and revenue to be stable for the rest of the year, albeit with some movements due to seasonality. And we expect underlying profitability, including to continue the improving trend. Thank you very much. That concludes our prepared remarks today. We are now open for questions. Operators, please proceed.