Qutoutiao Inc.

Hello, ladies and gentlemen. Thank you for standing by for the second quarter 2021 earnings conference call for Kutotiao Inc. At this time, all participants are in the 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, Saichi Liu. Please go ahead, Saichi.

Thank you very much. Welcome everyone to the second quarter of 2021 Earnings Conference Call of Xutou Tiao Inc. The company's financial and operational results were released via 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. 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 and 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 Chido Teo's earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Chido Teo'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 first. Thank you, Saishi, and thanks everyone for joining today's conference call. As our recent focus has been on repositioning the business and improving underlying financial health, we have had a relatively quiet and a stable second quarter, during which both our revenue and the size of our user base have maintained stability. Therefore, our monetization efficiency in terms of our pool was also on a stable trajectory, despite us facing some headwind in the overall advertising market. Post-COVID-19 in China, the market backdrop has not been on a whole favorable for digital advertising, although we did observe some recovery from the negative effect on advertisers' spending. It is the uncertainty or the lack of visibility going forward that has dictated much of advertising customers' budgeting decisions. We expect the second half of the year to continue to be under pressure, as there has not yet been a sign of a straight upward momentum. For our business, while we cannot control the wider industry variables, we focus on putting effort into improving operating efficiency and growing MEDU novels, which forms the key part of our growth strategy forward. MEDU has seen a very positive growth trend with DAU average in the second quarter of this year, so we are well on track to achieve our full-year targets. What is driving MeDo is our consistent investment into building a rich content offering and innovative format of interaction to reach users, most notably through our proprietary content creation platform and the mini-drama series, which we believe has more potential to create value than currently obvious. It is a naturally more engaging format and will play an important role in the exploration and the development of IP value of the books we own copyright to. Recently, there has been concern among investors and observers regarding the regulatory actions on the internet industry. We see them as a positive on the long-term health, growth, and stability of the Chinese tech industry, as well as the country's economy as a whole. As always, we will stick to the highest standard of conduct and compliance with rules and regulations of the land. Thank you very much. This concludes Eric's remarks, and I will now turn the call over to CFO Xiaolu.

Thank you, Eric and Caiqi. 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 second quarter were RMB $1,202,000,000 with our pool of RMB $0.46 and the quarterly average DAU of $29,000,000 and MAU of $132,000,000, fractured sequentially as we focus on underlying financial health while pursuing growth very selectively. Let's look at costs 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 RMB 328 million, a decrease of 17% year-on-year due to more efficient budgeting with our IT expenditures despite increasing content procurement costs. As a result, we generated RMB 874 million gross profit and 73% gross margin, which expanded both year-on-year and sequentially. Our sales and marketing expenditures for the second quarter totaled RMB 901 million, broadly flat year on year, and as a percentage of revenue, it came to 75%, which represented a 13 percentage point increase from a year ago, due to a combination of lower revenue base and increased investment in growing the user base of MeToo Novels. Our R&D expenses were R&D 116 million during the quarter, which was 10% of revenue, flat compared to a year ago. G&A expenses were RMB 90 million during quarter, which was over 7% of revenues, in line with historical trend. We made an operating loss of around RMB 200 million, which is within the controlled range. After breakeven in Q4 last year, our year-to-date loss has been the result of our ramped-up investment in middle novels, excluding which we were profitable in Q2 and Q3 consecutive quarters now. We also expect our overall business, including Midoo Novels, to be operationally profitable in the second half of this year, hence profitable for the full year. For the next quarter, i.e. Q3 of 2021, we expect revenue to be broadly stable, ranging between RMB $1.5 billion to RMB $1.1 billion. Thank you very much. That concludes our prepared remarks today. We are now open for questions. Operator, please proceed.