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spk02: 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.
spk04: 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.
spk05: 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.
spk02: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Once again, if you wish to ask a question, you may press star and the number one on your telephone keypad. Your first question comes from the line of Thomas Chong. Please ask your question.
spk03: Hi. Good evening. Thanks for taking my questions. I have a question about the Q2 revenue guidance. Can management comment about how we should think about the advertising momentum in coming quarters? And in particular, how's the trend across key industry categories? Are we actually seeing any slowdown in any particular vertical? And number two, with regard to MeDo, Can management reiterate again what's our KPI for this year in terms of the user and the revenue and any color on the KPI? I would be grateful. Thank you.
spk05: Thank you so much. So regarding our first question regarding the Q2 revenue guidance, as we have said in the prepared remarks, we took a balanced approach this year to our investment and growth, especially on the marketing side. So we do require a very good ROI for every marketing dollar we spent. So this year we expect to have That being said, I think in Q2, in particular, we do see some weakness in the advertising market, especially from March to May because some of the regulatory changes that have been made. actions taken by the government regarding the entire internet industry and also in particular for sectors like online education, I think we do see the mood to be dampened a bit in the late Q1 and the early Q2. However, we do see a strong demand for advertising for the June 18th e-commerce So I think overall we see the recovery trend in advertising market to continue for 2021, but we do see some certain weakness in Q2. But so far we think it's still being limited in certain sectors, and that does not change our outlook for the whole year. So regarding your second question for MEDU, as we have said before, we want to double MEDU's DAU and its revenue by year-end. So last year, Q4, MEDU's DAU was around $7 to $8 million, which means this year our year-end target will be over $15 million. And as we said in May, last May, So just one or two weeks ago, the peak DAU for MEDU has already surpassed 10 million. So I think we are right on track to achieve that year-end target goal for MEDU. And also, as we said, the output, the monetization rate for MEDU is actually also improving at the same time. So I think for the revenue target, we are even more confident to achieve. Thank you.
spk03: Thank you.
spk02: Once again, if you wish to ask a question, please press star and the number one on your telephone keypad. Your next question comes from the line of Vicky Wei. Please ask your question.
spk01: Good evening. Thanks, management, for taking my question. So following up on your question, on your comment about the good user growth of MEDU. The management provides some color about the user acquisition strategy and the entire user acquisition cost for MEDU. Thank you.
spk05: Sure. Thank you, Vicky. So for MEDU, I think the goal is to get to over $15 million in terms of the AU by year end. So we do want to make sure that we get to that number. That being said, we also will take a disciplined approach to make sure that we get good RIs for all the marking dollars we spend on MEDU. And so far, the results are quite promising because, as we have said before, the R pool, the monetization rate is also improving for Meidoo, and we are getting better user retention rate as well. So I think for us, we do believe that Meidoo has a long and good runway, and we are making very good investment in this business, and we will continue to do that for the rest of the year. Thank you.
spk01: Thank you.
spk02: Once again, if you wish to ask a question, please press star and the number 1 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.
spk04: thanks again for your time and if you have any further questions please do not hesitate to contact us and have a very good day this concludes this conference call you may now disconnect your line thank you Thank you.
spk06: © transcript Emily Beynon Hello. Thank you.
spk02: 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.
spk04: Thank you very much. Welcome, everyone, to the first quarter of 2021 earnings conference call of Chitotel 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.chitotel.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 Mitigation 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 U.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 revenues doubling on a year-on-year basis. Elsewhere in the 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 we 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.
spk05: 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 brackish 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 segments 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. Manipulation 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.
spk02: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Once again, if you wish to ask a question, you may press star and the number one on your telephone keypad. Your first question comes from the line of Thomas Chong. Please ask your question.
spk03: Hi. Good evening. Thanks for taking my questions. I have a question about the Q2 revenue guidance. Can management comment about how we should think about the advertising momentum in coming quarters? And in particular, how's the trend across key industry categories? Are we actually seeing any slowdown in any particular vertical? And number two, with regard to Mido, Can management reiterate again what's our KPI for this year in terms of the user and the revenue and any color on the KPI? I would be grateful. Thank you.
spk05: Thank you so much. So regarding our first question regarding the Q2 revenue guidance, as we have said in the prepared remarks, we took a balanced approach this year towards investment and growth, especially on the marketing side. So we do require a very good ROI for every marketing dollar we spent. So this year we expect to have That being said, I think in Q2 in particular, we do see some weakness in the advertising market, especially in March, from March to May, because some of the regulatory actions taken by the government regarding the entire internet industry and also in particular for sectors like online education. I think we do see the mood to be dampened a bit in late Q1 and early Q2. However, we do see a strong demand for advertising for the June 18th e-commerce So I think overall we see the recovery trend in advertising market to continue for 2021, but we do see some certain weakness in Q2. But so far we think it's still being limited in certain sectors, and that does not change our outlook for the whole year. So regarding your second question for MEDU, as we have said before, we want to double MEDU's DAU and its revenue by year-end. So last year, Q4, MEDU's DAU was around $7 to $8 million, which means this year our year-end target will be over $15 million. And as we said in May, last May, So just one or two weeks ago, the peak DAU for MEDU has already surpassed $10 million. So I think we are right on track to achieve that year-end target goal for MEDU. And also, as we said, the output, the monetization rate for MEDU is actually also improving at the same time. So I think for the revenue target, we are even more confident to achieve. Thank you.
spk03: Thank you.
spk02: Once again, if you wish to ask a question, please press star and the number one on your telephone keypad. Your next question comes from the line of Vicky Wei. Please ask your question.
spk01: Good evening. Thanks, management, for taking my question. So following up on your question, on your comment about the good user growth of MEDU. The management provides some color about the user acquisition strategy and the entire user acquisition cost for MEDU. Thank you.
spk05: Sure. Thank you, Vicky. So for MEDU, I think the goal is to get to over $15 million in terms of the AU by year end. So we do want to make sure that we get to that number. That being said, we also will take a disciplined approach to make sure that we get good RIs for all the marking dollars we spend on MEDU. And so far, the results are quite promising because, as we have said before, the R pool, the monetization rate is also improving for Meidoo, and we are getting better user retention rate as well. So I think for us, we do believe that Meidoo has a long and good runway, and we are making very good investment in this business, and we will continue to do that for the rest of the year. Thank you.
spk01: Thank you.
spk02: Once again, if you wish to ask a question, please press star and the number 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.
spk04: Thanks again for your time and if you have any further questions, please do not hesitate to contact us and have a very good day.
spk02: This concludes this conference call. You may now disconnect your line. Thank you.
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